Tags: Hoenig | Fed | Rate | Policy | Subsidizes | Wall | Street

Hoenig: Fed’s Rate Policy Subsidizes Wall Street Banks

Tuesday, 26 Jul 2011 12:47 PM

The U.S. central bank’s policy of holding interest rates near zero is a subsidy for large banks and redistributes wealth from savers to debtors, said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City.

Banks can borrow at 0.25 percent and buy Treasury bonds that yield 3 percent, keeping the difference. “It provides them a means to generate earnings and restore capital, but it also reflects a subsidy to their operations,” he said in testimony prepared for delivery to the House Subcommittee on Domestic Monetary Policy and Technology today in Washington.

“It is not the Federal Reserve’s job to pave the yield curve with guaranteed returns for any sector of the economy, and we should not be guaranteeing a return for Wall Street or any special interest group,” he said.

Hoenig, who doesn’t vote on monetary policy this year, has repeatedly urged the central bank to tighten monetary policy to limit inflation and avert the emergence of asset price bubbles. He voted eight straight times in 2010 against record stimulus led by Chairman Ben S. Bernanke, tying former Governor Henry Wallich’s record in 1980 for most dissents in a single year.

He repeated those arguments today in his appearance before the subcommittee chaired by Texas Representative Ron Paul, the Republican who wrote the book “End the Fed.”

The Fed’s policy also “increases the risk of misallocating real resources, creating a new set of imbalances or possibly a new set of bubbles,” Hoenig said.

Subsidies for Borrowers

The central bank’s policy of holding rates near zero also “redistributes wealth in this country from the saver to debtor by pushing interest rates on deposits and other types of assets below what they would otherwise be,” he said. The effect “requires savers and those on fixed incomes to subsidize borrowers.”

The Federal Open Market Committee voted on June 22 to conclude its $600 billion bond-buying program as scheduled and maintain its balance sheet near record levels. The FOMC also affirmed its pledge to keep its target interest rate near zero for an “extended period.” The rate has been in a range of zero to 0.25 percent since December 2008.

Earlier this year Hoenig, the central bank’s longest- serving policy maker, announced plans to retire on Oct. 1 after a 20-year career as leader of the Kansas City Fed. He is required under internal Fed rules to retire at age 65, an age he will reach in September.

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