Hoenig Urges Pre-Emptive Fiscal Policy to Avoid Crisis

The current U.S. fiscal policy outlook is a threat to both sustainable growth and price stability, the Federal Reserve Board's two key objectives, as well as a threat to the central bank's independence, Kansas City Fed president Thomas Hoenig said Tuesday.

Therefore, the only responsible way forward is to implement a pre-emptive fiscal policy focused on debt reduction, he said in prepared remarks for the Peterson-Pew Commission on Budget Reform Policy Forum.

What's more, leaving fiscal debt unchecked weakens currencies, Hoenig said. "Slowly, but inevitably, if the fiscal debt goes unaddressed, the currency weakens, as does access to global financial markets," he said. "And the cycle worsens, leading ultimately to a financial and economic crisis."

"Knowing inflation is not an acceptable alternative to strong fiscal management, a government faced with rising debt levels must provide a credible long-term plan to reestablish fiscal balance," Hoenig said. He added that history has showed multiple examples of times when letting debt get out of control has led to hyperinflation and increased political pressure on central banks.

Acting now is the only sustainable solution, even though the fixes do not come without short-term pain, he said.

Despite the inevitable pain, "in my view it is the responsible path to sustainable economic growth with price stability," Hoenig said. The "current outlook for fiscal policy poses a threat to the Federal Reserve's ability to achieve its dual objectives of price stability and maximum sustainable long-term growth, and therefore is a threat to its independence as well."

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