Hoenig Says Excessive Liquidity Can Lead to `Very Bad Outcomes'
Thomas Hoenig, Federal Reserve Bank of Kansas City
Matthew Staver/Bloomberg
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. Photographer: Matthew Staver/Bloomberg
Kansas City Federal Reserve President Thomas Hoenig said that pumping excessive liquidity into the banking system may harm the economy, potentially causing higher unemployment.
“Monetary policy is about an environment that’s supposed to be stable,” Hoenig said yesterday at an economic forum in Albuquerque, New Mexico. “When you try to use it in a way that floods the market with liquidity, you can in fact get very bad outcomes,” including financial instability that leads to increased joblessness.
Fed Chairman Ben S. Bernanke and other policy makers will meet in Washington on Nov. 2-3 to consider whether to stage a new round of asset purchases, or quantitative easing, to boost an economy stagnating with unemployment above 9.5 percent and inflation at levels some policy makers consider too low.
“My experience tells me that if you wait until you’re absolutely certain that everything is fine, you waited too long,” said Hoenig, the Fed’s longest-serving policy maker, who has dissented from every decision of the Federal Open Market Committee this year. The FOMC said on Sept. 21 that it’s prepared to take action “if needed” to spur growth and achieve its mandate of stable prices and full employment.
Hoenig has said he opposes further asset purchases to boost the economy and has argued that the Fed should begin taking steps to lift interest rates from near zero. The benefits of further purchases “are likely to be smaller than the costs,” he said to the National Association for Business Economics this month.
Core Rate
The Fed’s preferred price gauge, the core personal consumption expenditures index, has risen at 1.4 percent on a year-over-year basis in June, July and August -- lower than the 1.7 percent to 2 percent rate of inflation that Fed officials favor over the long term.
Fed officials such as Chicago Fed President Charles Evans have said the U.S. economy is in a liquidity trap, and raising inflationary expectations could help the economy grow more quickly.
“Fine tuning inflationary expectations with the blunt instrument called monetary policy is a highly risky endeavor,” said Hoenig, 64, who has led the Kansas City Fed since 1991.
“I don’t think we’re in a liquidity trap because we are, in fact, growing and we will continue to grow unless we create another crisis,” Hoenig said in response to audience questions.
The National Bureau of Economic Research said last month that the worst U.S. recession since the Great Depression ended in June 2009. Economic growth slowed to an annualized 1.7 percent rate in the second quarter from 3.7 percent in the first three months of the year.
Temporary Workers
October is expected to be the first month since May in which the U.S. economy adds jobs, now that the government is no longer laying off large numbers of temporary census workers. The Labor Department will report on Nov. 5, two days after the Fed’s meeting, that the economy added 65,000 jobs in October, according to the median of a Bloomberg Survey.
The Fed lowered interest rates to a range of zero to 0.25 percent in December 2008 and has pledged to keep them there for an “extended period.”
Hoenig repeated his argument that interest rates should be raised modestly above zero. “I am against high interest rates while we’re in a fragile recovery,” he said, “I’m for non- zero.”
To contact the reporter on this story: Joshua Zumbrun in Albuquerque, New Mexico at 1984 or jzumbrun@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net
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