NEW YORK – The fed funds rate must stay accommodative, but also must begin to rise now so increases can be slow and deliberate, Federal Reserve Bank of Kansas City President Thomas Hoenig said Friday.
“I agree that the Federal Reserve needs to keep its policy rate accommodative. For a while longer, it should remain even below the long-run equilibrium rate,” he told a town hall meeting in Nebraska, according to prepared text of the speech, which was released by the Fed. “However, the economy is improving and is growing at a rate faster than the last two recoveries. Importantly, the recent financial crisis and recession was not caused by high interest rates but by low rates that contributed to excessive debt and leverage among consumers, businesses and government. We need to get off of the emergency rate of zero, move rates up slowly and deliberately. This will align more closely with the economy’s slow, deliberate recovery so that policy does not lag the recovery.”
He warned that monetary policy “cannot solve every problem faced by the United States today. In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long. I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut.”
The recovery has been modest with mixed results, Hoenig said, adding, “We are recovering from a horrific set of shocks, and it will take time to `right the ship.’”
“I advocate dropping the `extended period’ language from the FOMC’s statement and removing its guarantee of low rates,” he said. “This tells the market that it must again accept risks and lend if it wishes to earn a return. The FOMC would announce that its policy rate will move to 1% by a certain date, subject to current conditions. At 1%, the FOMC would pause to give the economy time to adjust and to gain confidence that the recovery remains on a reasonable growth path. At the appropriate time, rates would be moved further up toward 2%, after which the nominal fed funds rate will depend on how well the economy is doing.”
