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.

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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