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The U.S. economy is recovering and the Federal Reserve needs to raise interest rates, lest it leave in place a policy that will only fuel future financial imbalances, Federal Reserve Bank of Kansas City President Thomas Hoenig said Friday.
Bloomberg News
Kansas City Fed President Thomas Hoenig
“We need to get off of the emergency rate of zero, move rates up slowly and deliberately,” which will bring policy in better alignment “with the economy’s slow, deliberate recovery,” the official said. While the markets may like the current stance of monetary policy, Hoenig said “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut.”
Hoenig’s remarks — they came from the text of a speech to be delivered Friday before a meeting with the community in Lincoln, Neb. — came on the heels of his latest dissent against the consensus view of the Fed.
On Tuesday, the Fed decided to provide additional support to an economy whose recovery appears to be faltering, by deciding to maintain the size of its balance sheet, rather than letting it slowly shrink. The Fed will do this by reinvesting the proceeds of its vast mortgage holdings back into Treasurys.
The action is controversial. Its economic impact is uncertain and some felt the Fed took the step simply to show to markets they were willing to do something given the economy’s problems.
Hoenig has been a persistent critic of the Fed’s stance throughout his tenure this year as a voter on Federal Open Market Committee. He has fretted that the current stance of policy could give way to fresh financial imbalances. His confidence in the recovery has led him to advocate raising interest rates, as well.
On Tuesday, Hoenig’s dissent continued to worry that keeping interest rates effectively at zero is limiting the central bank’s flexibility. He also believed the economic outlook didn’t justify trying to maintain the size of the balance sheet.
Despite the persistence of his opposition, Hoenig appears to have found no fellow travelers among the voting ranks of the FOMC, although some other regional Fed banks do appear to share his views the recovery is proceeding more or less as expected.
In his remarks, Hoenig tilted against the widespread worry about the state of the economy.
“Economic conditions are far from satisfactory, unemployment is simply too high, and we want a stronger recovery,” the official said. But, this “modest” recovery, tempered by “mixed” results, is “proceeding as many economists earlier this year outlined that it would,” and the gross domestic product is likely to rise by 3% through the rest of the year, he said.
“While monthly data may be mixed, the trend data are consistently positive,” the policy maker said. “Private job growth has been less than hoped for but positive nonetheless,” and “we are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries.”
Hoenig also doesn’t expect another fear about the direction of prices to come to pass, saying “I find no evidence that deflation is the most serious threat to the recovery today.”
As he has done in the past, Hoenig advocated raising the ged funds rate target from its current 0% level to 1%, taking stock of economic and market conditions, and then moving to 2%.
“I agree that the Federal Reserve needs to keep its policy rate accommodative,” and modest rate rises won’t conflict with that, Hoenig said. “For a while longer, it should remain even below the long-run equilibrium rate. However, the economy is improving and is growing at a rate faster than the last two recoveries,” and policy needs to respond.
Markets need to adjust to that, as well. “Of course the market wants zero rates to continue indefinitely: They are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases,” Hoenig said.
Bloomberg News
Kansas City Fed President Thomas Hoenig
“We need to get off of the emergency rate of zero, move rates up slowly and deliberately,” which will bring policy in better alignment “with the economy’s slow, deliberate recovery,” the official said. While the markets may like the current stance of monetary policy, Hoenig said “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut.”
Hoenig’s remarks — they came from the text of a speech to be delivered Friday before a meeting with the community in Lincoln, Neb. — came on the heels of his latest dissent against the consensus view of the Fed.
On Tuesday, the Fed decided to provide additional support to an economy whose recovery appears to be faltering, by deciding to maintain the size of its balance sheet, rather than letting it slowly shrink. The Fed will do this by reinvesting the proceeds of its vast mortgage holdings back into Treasurys.
The action is controversial. Its economic impact is uncertain and some felt the Fed took the step simply to show to markets they were willing to do something given the economy’s problems.
Hoenig has been a persistent critic of the Fed’s stance throughout his tenure this year as a voter on Federal Open Market Committee. He has fretted that the current stance of policy could give way to fresh financial imbalances. His confidence in the recovery has led him to advocate raising interest rates, as well.
On Tuesday, Hoenig’s dissent continued to worry that keeping interest rates effectively at zero is limiting the central bank’s flexibility. He also believed the economic outlook didn’t justify trying to maintain the size of the balance sheet.
Despite the persistence of his opposition, Hoenig appears to have found no fellow travelers among the voting ranks of the FOMC, although some other regional Fed banks do appear to share his views the recovery is proceeding more or less as expected.
In his remarks, Hoenig tilted against the widespread worry about the state of the economy.
“Economic conditions are far from satisfactory, unemployment is simply too high, and we want a stronger recovery,” the official said. But, this “modest” recovery, tempered by “mixed” results, is “proceeding as many economists earlier this year outlined that it would,” and the gross domestic product is likely to rise by 3% through the rest of the year, he said.
“While monthly data may be mixed, the trend data are consistently positive,” the policy maker said. “Private job growth has been less than hoped for but positive nonetheless,” and “we are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries.”
Hoenig also doesn’t expect another fear about the direction of prices to come to pass, saying “I find no evidence that deflation is the most serious threat to the recovery today.”
As he has done in the past, Hoenig advocated raising the ged funds rate target from its current 0% level to 1%, taking stock of economic and market conditions, and then moving to 2%.
“I agree that the Federal Reserve needs to keep its policy rate accommodative,” and modest rate rises won’t conflict with that, Hoenig said. “For a while longer, it should remain even below the long-run equilibrium rate. However, the economy is improving and is growing at a rate faster than the last two recoveries,” and policy needs to respond.
Markets need to adjust to that, as well. “Of course the market wants zero rates to continue indefinitely: They are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases,” Hoenig said.
Long story short: The Fed is handing out free money, so why engage in the risky, capitalist decisions that drive the market?
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