DENVER (Reuters) - Dallas Federal Reserve Bank President Robert Kaplan said on Friday that it “bothers” him that banks now must borrow from each other overnight at higher rates than they would for longer periods - a topsy turvy situation that he said could lead to tighter financial conditions.
“The thing that bothers me is that the Fed funds rate, which we’ve had for a few months, is above the entire Treasury curve,” Kaplan said. That was the situation until recently; currently the midpoint of the Fed’s policy target remains higher than all Treasury yields except the 30-year Treasury bond.
The Fed targets the overnight bank-to-bank lending rate in a range of 1.75%-2.00%, and it has lately hovered around 1.85%. Meanwhile the yield on the benchmark 10-year U.S. Treasury note is 1.76%; the yield on a 5-year note is 1.57%.
“If you can’t borrow short and lend long ... it is my judgment ... that you’re eventually going to see a tightening of conditions,” Kaplan said at an energy conference in Denver, adding that he is “agnostic” about whether the Fed needs to lower interest rates again this year.
Reporting by Howard Schneider; Editing by Alex Richardson, Sandra Maler and Cynthia Osterman