Fed’s Hoenig Sees Risk In Extended Low Rates

KANSAS CITY — Kansas City Federal Reserve Bank president Thomas Hoenig made clear yesterday that as a voter on the Federal Open Market Committee in the coming year he will be an advocate of relatively early monetary tightening.

Hoenig, in remarks prepared for the Central Exchange, warned that keeping the federal funds rate near zero for “an extended period” not only risks inflation and resource misallocation, but also impedes economic and financial recovery.

He said the Fed needs to raise the federal funds rate back up to a “more normal” 3.5% to 4.5%. He said he favors getting monetary policy back to a “more balanced” level “sooner rather than later.”

Hoenig said monetary policy is not the appropriate tool for reducing “structural unemployment” and warned that holding rates too low for too long can actually lead to worse joblessness.

He suggested that both monetary and fiscal policymakers are on the cusp of critical decision making.

“Economic growth has increased, labor market conditions have begun to stabilize, and housing shows signs of recovery,” Hoenig said.

“Even so, as with other recent recoveries, progress seems painfully slow and uneven. Uncertainty remains.” “It is at this point, when conditions are mixed but pointing to improvement, that the questions facing central banks and governments are the most delicate,” he added. “They must consider whether to scale back policy interventions, and how best to return to more normal settings, without hampering the recovery.”

— Market News International

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