Tags: Hoenig | Doubts | Effectiveness | Fed | easing | thomas

Hoenig Doubts Effectiveness of Additional Fed Asset Purchases

Tuesday, 12 Oct 2010 12:10 PM

Thomas Hoenig, the Federal Reserve’s longest-serving official, cast doubt on the effectiveness of a possible new round of asset purchases to stimulate the economy, saying the costs are likely to outweigh the benefits.

Undertaking such a move without clear terms and goals “becomes an open-ended commitment that leads to maintaining the funds rate too low and the Federal Reserve’s balance sheet too large,” Hoenig, president of the Kansas City Fed, said in the text of a speech today in Denver. “The result is a further misallocation of resources, more imbalances, and more volatility.”

Hoenig, the only policy maker to cast dissenting votes on the Federal Open Market Committee this year, reiterated his view that officials should begin taking steps to lift interest rates from near zero. Central bank policy makers are debating how to deploy tools for more stimulus after the FOMC said on Sept. 21 that it’s prepared to take action “if needed” to spur growth and achieve its mandate of stable prices and full employment.

The benefits of further purchases “are likely to be smaller than the costs,” he said to the National Association for Business Economics.

“These are difficult times, no doubt, and it is tempting to think that zero interest rates can spark a quick recovery,” he said. “However, we should not ignore the possible unintended consequences of such actions.”

Stocks Gain

The Dow Jones Industrial Average has risen more than 2 percent since the Fed’s Sept. 21 meeting on expectations the central bank will take further action to spur the economy. Two- year Treasury yields fell to a record 0.327 percent today before trading little changed at 0.35 percent at 11:03 a.m. in New York.

The Fed will release minutes of the Sept. 21 meeting at 2 p.m. today New York time.

The U.S. economy is undergoing a “modest recovery” with “highly encouraging” signs, and yet new jobs being added by the private sector aren’t enough to bring down unemployment, which stands at 9.6 percent, Hoenig said.

The U.S. lost more jobs than forecast in September as local governments fired teachers and other workers in response to declining tax revenue, a government report showed last week.

Payrolls fell by 95,000 workers after a revised 57,000 decrease in August. Private employers added 64,000 jobs, less than forecast. Wages and the workweek stagnated.

Hoenig, 64, has led the Kansas City Fed since 1991.

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Thomas Hoenig, the Federal Reserve s longest-serving official, cast doubt on the effectiveness of a possible new round of asset purchases to stimulate the economy, saying the costs are likely to outweigh the benefits.Undertaking such a move without clear terms and goals ...
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