NEW YORK – Low interest rates encourage borrowing and debt that often have negative outcomes, Federal Reserve Bank of Kansas City President Thomas M. Hoenig said today.
Low interest rates, combined with a pledge they will continue “led bankers and investors to feel `safe’ in the search for yield, which involves investing in less-liquid and mroe risky assets,” Hoenig told the Bartlesville Federal Reserve forum, according to prepared text of his remarks, which were released by the Fed.
“It was after a period of too-low interest rates, too much credit, too much leverage that the collapse of the housing bubble, the rapid deleveraging and the ensuing financial crisis occurred,” he said.
Hoenig also blamed low interest rates in the mid-1970s and early 1980s for the recession of the early 1980s.
“In the drive to achieve price stability and stable growth, monetary policy is a powerful tool. Certainly lowering interest rates is the appropriate monetary policy response to the onset of an economic recession and rising unemployment. But it is also a blunt instrument that has a wide set of intended but also unintended consequences that can and have worsened economic outcomes including misallocation of precious resources, inflation and long-term unemployment,” he said. “This is why we want to return to a sustainable long-term equilibrium policy rate, starting soon.”
