Federal Reserve Bank of Kansas City President Thomas Hoenig said the U.S. economy is strengthening and that dissent by policymakers is essential to the success of the central bank.

“I am increasingly confident that the recovery is both sustainable and likely to gain strength over the next several quarters,” Hoenig said today in the text of remarks for a speech in Kansas City, Missouri. Annual real gross domestic product will probably increase by 3.5 percent to 4 percent for the next couple of years, he said.

Hoenig reiterated his opposition to current Fed policy, saying the central bank has “maintained an emergency monetary policy stance in a recovering economy and has continued to ease into the recovery.” The actions “risk creating a new set of imbalances, or bubbles,” said Hoenig, the Fed’s longest-serving policymaker.

The Federal Open Market Committee said improvements in the economy weren’t sufficient to alter its commitment to buy an additional $600 billion of Treasurys through June, according to minutes of its Dec. 14 meeting released yesterday. Hoenig has opposed the record stimulus, which has failed to reduce an unemployment rate stuck near a 26-year high.

“Such actions as they continue are demanding the saving public and those on fixed incomes to subsidize the borrowing public,” Hoenig said.

In his eighth dissent last year, Hoenig reiterated his view that “a continued high level of monetary accommodation” may eventually “destabilize the economy,” according to the FOMC’s Dec. 14 statement.

Enough Stimulus

Hoenig told his colleagues that their Dec. 14 policy statement “should indicate that sufficient monetary stimulus was in place to support the recovery,” according to the minutes of the Fed’s meeting that day. He tied former Governor Henry Wallich’s record in 1980 for most dissents in a year.

In his speech, Hoenig said core inflation “will remain modest in the near term.”

The rate of inflation slowed throughout 2010. The personal consumption expenditures index, excluding food and energy, increased 0.8 percent in November from a year earlier, down from 1.8 percent in December 2009. Including all items, inflation was 1 percent, down from 2.4 percent at the end of 2009.

“Given the degree of monetary and fiscal stimulus in place in the economy currently, inflation should move higher over the medium and longer term, depending on what further steps are taken in these policy areas,” he said.

The risk of a further slowing of inflation or outright falling prices are “small and, with an improving economy, should only decline further in the coming months.”

Role of Dissent

Hoenig devoted half of his speech to defending the role of dissent in the making of monetary policy. At the Nov. 2-3 FOMC meeting, Vice Chairman Janet Yellen was made the head of a subcommittee to review the FOMC’s communications guidelines.

Hoenig dismissed concerns that dissent by Fed officials has muddled the effectiveness of monetary policy.

“The idea that a dissenting vote is confusing, counterproductive, and generally undesirable is unhealthy,” Hoenig said.

The Fed was designed to encourage disparate views, he said, adding, “is the nation somehow better served by giving the public the impression that the entire body is in agreement to the prescribed approach even when that is not the case?”

Fed presidents rotate voting on monetary policy and Hoenig, 64, will not vote this year. He joined the Kansas City Fed in 1973 as an economist in banking supervision, after earning his doctorate at Iowa State University. Hoenig became president of the Kansas City Fed in 1991.

Rotate Onto Committee

This year Chicago Fed President Charles Evans, Richard Fisher of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis will rotate onto the committee. As president of the New York Fed, William Dudley has a permanent vote.

Former Fed governor Lyle Gramley said in an interview on Bloomberg TV last week that Plosser and Fisher may pick up where Hoenig left off, casting dissents against the FOMC’s decisions.

“I recognize that the committee’s majority might be correct,” Hoenig said. “In fact, I hope that it is.”