Friday, December 14, 2012

Fed’s Fisher Worries About ‘Hotel California’ Monetary Policy

This is a great characterization by Dallas Fed President Richard Fisher.

He said Friday on CNBC he opposed the Federal Open Market Committee‘s recent decision on targeting employment and he was extremely concerned that it would become increasingly difficult to exit the Fed’s accomodative monetary policy.

“We are at risk of what I call a ‘Hotel California’ monetary policy, referring to the Eagles’ song, where we can check out any time we want from this program, but we can never leave” due to the massive growth in the Fed's balance sheet, he said.

As I have pointed out many times, a large portion of money that the Fed has printed has been put, by banks, back at the Fed as excess reserves. At present, $1.4 trillion sits in excess reserves that banks, at any time, could draw on and loan out. They only earn 0.25% with the Fed. The big question is how does the Fed prevent this money from rapidly flowing out in the system?

Thus, the 'Hotel California' problem. The Fed can raise reserve requirements or interest rates on excess reserves to stop outflow, but this could result in a dramatic increase in market interest rates. Thus the Fed can check the money flow at anytime, but can they really leave the money printing scene, given what it would do market interest rates?


  1. Well, we need higher interest rates though don't we? Even though it would cause some short term pain.

    I guess this is the problem with central planning, they can never accurately predict or control what the market wants and their tinkering always makes things worse.

  2. The Fed is working hard to manipulate the yield curve on T-bills.

    We all know that at some point those yields will rise - manipulated or not.

    When they do the Fed's excess reserves will drain like mad to get a piece of the rising-interest-yield action.


    Instant mass price inflation!

  3. Peter Schiff always says The Federal Reserve Bank has checked into the Roach Motel of monetary policy. You can check in, but you can't check out.

  4. Couldn't the Fed just pay a higher rate on excess reserves? If commercial banks feel the risk is worth the extra rate earned in the markets, the Fed could simply offer a rate that's marginally higher. Of course, this would lead to ever increasing monetary-inflation, but it would keep excess reserves at the Fed and NOT leveraged in the market. Comments and critiques welcome...

  5. I was wondering the same thing. And I would have asked it during Robert Murphy's lecture on the Great Depression tonight at the Mises Academy, but I only thought about it afterwards.

    I'm not sure how that would play out. Would it lead to ever higher Fed rates (paid) to keep the reserves parked? Would the Fed be able to keep the excess reserves parked indefinitely?

    It is an interesting question.