Tuesday, March 30, 2010

Fed's Fisher: Federal Reserve Won't Buy Treasury Securities to Dampen Climbing Interest Hikes

Dallas Federal Reserve Bank President Richard Fisher gave a noteworthy speech Tuesday evening at the University of Arizona in Tucson.

He said  that record federal borrowing is putting upward pressure on longer term interest rates, but doubted the Fed would ever buy Treasury securities to hold down those rates. That's a big statement. As to whether the Fed will actually do as Fisher suggests and not respond to climbing rates, we may learn much sooner than most expect. Weak demand at Treasury auctions is pushing rates higher, right now.

Fisher has clearly thought about the subject. At one point he said:

What if the insatiable borrowing of the Treasury leads to upward pressure on rates? Would the Fed then step in and buy a bundle of Treasuries just to hold rates down?
I think not. For, should we do so, we would only become an accomplice to the fiscal incontinence of Congress.

We would be perceived as 'monetizing the debt,' a trap that inevitably leads to hyperinflation and economic destruction.We would lose all the hard-earned credibility we have gained by our conduct in the crisis if we came to be viewed by markets as a handmaiden of spendthrift political forces.
These words are as close as you will hear a Fed member utter Clint Eastwood type, "Make my day" words.

If Fisher is serious, and other Fed members are in sync with his thinking, then we are about to witness one of the largest spikes in interest rates in history. You have a capital structure that is short money because of the Fed's current tight money policy and you have the Treasury throwing debt onto the market at record rates. On the demand side, you have the Social Security Trust Fund moving from a net-buyer to a net-seller, and you have China as an unenthusiastic buyer, if they even are net-buyers. This is a combination that signals much higher rates from every possible direction.

Of course, if the Fed holds the line on money printing it will be one of the few times in history that a central bank has not bailed out a country.

Bottom line, interest rates are headed much higher, even if the Fed attempts to dampen the rate hikes. However, if Fisher is doing more than just talking smack and the Fed does not intervene, we are talking huge spikes in  rates. Indeed, 50 basis point moves, or more, week after week can't be ruled out.


  1. Sorry... the Fed HASN'T been monetizing the debt so far? Or they won't continue to do it? I was under the impression they'd already been targeting the long bond?

    What about "indirectly" by buying the new Treasury issuance back from primary dealers only a few days after the auctions?

  2. The bond market for US Treasuries broke down February 8, 2010 as can be seen in the chart of the 10 Year Note, long term US Treasury Bonds, and zeros, compared to the Revenue Shares Financials, RWW, Reits, RWR, and Retail, XRT ... http://tinyurl.com/yj89knn

    The chart of 200% inverse of US Treasuries, TBT, shows this bear market ETF is in breakout.

    The yield curve as seen $UST30Y:$UST10Y is flattening; once it steepens again, expect gold to explode higher.

  3. I don't think everybody's in agreement at the Fed. From what I read, the regional banks are largely impotent when it comes to making policy or standing up to the board.

  4. The Fed has no choice but to topple the stock market to get the bonds sold. I wrote about this at Seeking Alpha.

  5. Is the audit bill still alive? If it is, could this be something the Fed uses for leverage later to make sure it doesn't become law?

    "We will monetize debt if you veto the audit bill."