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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for February 22nd, 2010

Fed’s Lockhard on Reuters

Posted by WARREN MOSLER on 22nd February 2010

Latest tsy tips results indicate ‘contained inflation expectations’ as well.

I still have that nagging feeling that the 0 rate policy is highly deflationary and without some supply shock, like a spike in crude prices, prices in general will remain weak.

The weak core CPI and high unemployment rate continues to keep a lot of daylight between current conditions and the Fed’s dual mandate.

And the discount rate hike shows an ongoing lack of understanding of their own monetary arrangements.

Up until a few years ago the discount rate was kept a bit below the fed funds rate, which facilitated easier control of the fed funds rate.

This policy changed in a misguided effort to make the discount rate a ‘penalty’ rate which is a throwback to a fixed fx/gold standard paradigm and is entirely inapplicable with our current non convertible currency and floating fx.

All they’ve done by raising the discount rate is make it a bit more problematic to control the fed funds rate should technicals cause a system wide reserve deficiency.

Putting a penalty rate in for solvent banks (the FDIC is charged with removing insolvent banks) having funding difficulties is a throwback to the long discredited and illogical notion of using the liability side of banking for market discipline.

for more detail click here

Subject: Fed’s Lockhard on Reuters

Front end USTs getting very well bid on the back of these comments…

10:11 19Feb10 RTRS-FED’S LOCKHART -

FED PAYING CLOSE ATTENTION TO INFLATION EXPECATIONS

10:13 19Feb10 RTRS-

FED’S LOCKHART – MARKET BELIEF IN HIGH PROBABILITY OF RATE RISE THIS YEAR “OVERBLOWN”

10:14 19Feb10 RTRS-

FED’S LOCKHART – CURRENT POLICY STANCE MORE LIKELY TO EXTEND INTO NEXT YEAR

Posted in Employment, Fed, Inflation | 11 Comments »