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Hoenig Opposes Further Fed Easing, Warns About Prices

Thursday, 07 Oct 2010 03:46 PM

Kansas City Federal Reserve Bank President Thomas Hoenig said the central bank shouldn’t expand its balance sheet by purchasing more Treasury securities in an effort to spur economic growth.

“I am not at that point yet,” Hoenig said today at a forum hosted by the bank in Norfolk, Nebraska. “I don’t think we should go that way at all.”

The central bank is considering the purchase of more Treasury securities to stimulate the economy and reduce unemployment persisting near 10 percent. New York Fed president William Dudley and Chicago Fed President Charles Evans have voiced support for more purchases, while Charles Plosser of Philadelphia and Richard Fisher of Dallas said such a plan may not work.

Hoenig, the Fed’s longest-serving policy maker, dissented last month from the Fed’s decision to keep its bond holdings level by reinvesting maturing mortgage-backed securities in Treasuries. He has dissented six straight times, tying a record for most consecutive dissents at regular Federal Open Market Committee meetings since 1955.

The Kansas City Fed official repeated his view that the Fed should raise its short-term target rate to 1 percent, then pause to assess the economy’s recovery. He also rejected the idea of raising the Fed’s informal inflation target above 2 percent because of concern over the possibility of falling prices.

Inflation Target Horror

“I have to tell you it horrifies me,” Hoenig said, responding to an audience question. “It assumes you can fine- tune things like interest rates.”

“I have never agreed to” an informal inflation target, he said. “Two percent inflation over a generation is a big impact.”

After cutting rates to near zero, the Fed turned to its balance sheet as a primary tool of monetary policy. The Fed’s total assets, which include loans and securities other than those used for monetary-policy operations, have risen to $2.3 trillion from $878 billion at the start of 2007.

The central bank after its Sept. 21 meeting said inflation is “somewhat below” levels consistent with its congressional mandate for stable prices. The Fed said it was “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

The central bank should heed the long-term risks from its low-interest rate policy, including the threat of accelerating inflation, Hoenig said.

Inflation ‘Impulses’

“My view is in the long term, we need to think about the implications of today’s extremely low rates for the future,” Hoenig said. “This much liquidity in the system as the economy improves and strengthens, there will be tendencies for inflationary impulses to arise,” he said.

“If we get inflationary impulses, that is inconsistent with long term stable prices,” he said.

Hoenig compared today’s interest rates to Fed policy earlier this decade.

“Tight monetary policy had nothing to do with the unemployment rate of 9.6 percent. It was low interest rates that had a lot to do with it,” Hoenig said. He cited how the Fed lowered interest rates to 1 percent in 2003 and 2004.

Hoenig repeated his view that the U.S. economy is continuing a recovery, though job growth has been less than he wants.

‘Grow Modestly’

“We continue to grow modesty,” he said. “It is positive growth and I suspect it will continue to be positive growth going forward.”

The worst U.S. recession since the Great Depression ended in June 2009, the National Bureau of Economic Research said on Sept. 20.

Still, a slowdown raises the possibility of another downturn. Economic growth decelerated to an annualized 1.7 percent rate in the second quarter from 3.7 percent in the first and 5 percent in the last three months of 2009, according to the Commerce Department.

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Kansas City Federal Reserve Bank President Thomas Hoenig said the central bank shouldn t expand its balance sheet by purchasing more Treasury securities in an effort to spur economic growth. I am not at that point yet, Hoenig said today at a forum hosted by the bank in...
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Thursday, 07 Oct 2010 03:46 PM
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