NEW YORK – With the crisis over and the economy recovering, policymakers need to shift their vision to see the long-term consequences of their short-term goals and begin removing policy accommodation, Federal Reserve Bank of Kansas City President Thomas Hoenig reiterated Wednesday.
Noting that it has been a difficult three years for policymakers and although he sometimes argued with the methods, he supported the liquidity injections, Hoenig said, “when the crisis is past, it is incumbent upon central banks to return to another of their responsibilities: creating conditions for a sustained economic recovery that requires looking beyond short-term goals to long-term consequences.”
Detailing his statements and votes to “begin unwinding those policies put in place during the crisis,” Hoenig said, “Today, my view has not changed. The FOMC should gradually allow its $3 trillion balance sheet to shrink toward its pre-crisis level of $1 trillion. It should move the U.S. federal funds rate off of zero and toward 1 percent within a fairly short period of time. Then, after evaluating the effects of those actions, it should be prepared to move the funds rate further toward a level that could be reasonably judged as closer to normal and sustainable.”
While the actions aren’t simple to implement, hitting “different economic sectors differently and to varying degrees. They involve tradeoffs in their effects and uncertainty about the short-term reactions of financial markets and the real economy. However, they are not unreasonable or radical or inconsistent with our experience in dealing with past crises. They are focused on the longer run – reflecting a sharp awareness that policy geared too long toward extensive accommodation undermines market discipline and encourages speculative activities. Put another way, these actions reflect the view that the longer exceptionally accommodative monetary policies remain in place, the greater the danger that resources will be misallocated within and across world economies,” Hoenig said according to prepared text of his remarks to the London School of Economics.
Stating that monetary policy “is more accommodative now than at the height of the crisis,” Hoenig said, “the FOMC’s objectives have shifted from that of containing a global crisis to that of more quickly accelerating economic growth. Its components focus on raising inflation expectations, increasing asset values and pushing up growth in aggregate demand, and, as stated in its September 2010 press release, employment. While I agree these are worthy goals, I am concerned that maintaining a crisis-oriented policy as the tool to achieve them significantly changes the economic risks. Past success in pursuing this form of policy is mixed at best.”
Warning that current policy, if unchecked, “almost certainly will stimulate the growth of asset values and inflation,” Hoenig said, “This may temporarily increase GDP and employment, but in the long run, we risk instability, damaging inflation and lost jobs, which is a dear price for middle and lower income citizens to pay.”
