By Steven K. Beckner and Claudia Hirsch
NEW YORK (MNI) – Dallas Federal Reserve Bank President Richard
Fisher Wednesday said the economy is “ready” for the Fed to “normalize”
the spread between the federal funds rate and the discount rate and said
that is why his Bank’s board of directors recently requested an increase
in the primary credit rate.
Fisher, speaking to reporters following a luncheon address to a
conference sponsored by the Levy Economics Institute, emphasized that a
further increase in the discount rate would not represent a tightening
of monetary policy — merely a “normalization” of the spread between the
funds rate and the discount rate.
Fisher also told reporters he opposes the Federal Open Market
Committee’s continual assertions that it expects the federal funds rate
to stay “exceptionally low … for an extended period.”
Earlier, in response to audience questions, Fisher blamed the
steeping of the yield curve partially on a strengthening, though
“tepid,” economic recovery and partially on heavy borrowing by the U.S.
Treasury to finance record budget deficits.
Unless and until Congress and the White House “get their act
together” and reduce the deficit, bond prices will continue to “be
affected,” he said.
While calling for a normalization of discount window rates, Fisher
said the economy has “enormous excess capacity” and “the lowest
inflation pressures we’ve seen in years.”
During the financial crisis, the Fed narrowed the spread between
the funds rate and the penalty discount rate from 100 basis points to 25
basis points in two steps.
On Feb. 18, citing “continued improvement in financial market
conditions,” the Fed Board of Governors raised the discount rate from 50
basis points to 75 basis points. That had the effect of widening the
spread from 25 to 50 basis points.
Sources have told MNI there is no rush to further widen the spread
and, for that matter, no preconceived notion that the spread needs to
return to the pre-crisis 100 basis points.
But the Dallas Fed did put in a request for a further
spread-widening increase in the discount rate in advance of a Board
meeting last Monday.
Fisher said his Bank’s board of directors made the request out of a
desire “to normalize” the spread. “We would like to get it back to 100″
basis points.
“It’s nothing about monetary policy — just to get back to normal,”
he told reporters.
“We think the economy is ready for it,” he added.
Asked about the “extended period” phrase, Fisher said “I was never
in favor of that language.”
Earlier, in comparing the United States and debt-hobbled Greece,
Fisher observed that the U.S. now has a “steepening of the yield curve.”
“Part is due to the strengthening recovery,” he said, though he
called it “a limpid recovery.”
But he said the yield curve is also steepening because “the
price of (Treasury) debt is being affected” by federal deficit
financing.
“Something has to be done,” he said, adding, “the worst thing to be
done would be for the Fed to monetize the debt.”
“The fiscal authorities have to get their act together,” Fisher
went on. “Until they do the price will be affected.” And he repeated
that “the worst possible outcome would be for the Fed to accommodate”
fiscal policy.
Turning to the issue of inflation, Fisher said wage pressures are
the least of the economy’s problems just now. “There is way too much
slack in the system,” he said, adding that there is “enormous excess
capacity.”Far from t borrowing.
As a result, he said, “we have some of the lowest inflation
pressures we’ve seen in 33 years.”
But Fisher cautioned that, as time goes on, the Fed will need to
“be mindful” of the potential for the roughly $1 trillion of excess
reserves to generate inflation pressures as and when they begin to flow
into the economy in the form of expanded bank lending.
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