Fed’s Hoenig Says U.S. Economic Outlook Positive Amid Risks

Federal Reserve Bank of Kansas City President Thomas Hoenig, the Fed’s longest-serving policy maker, said U.S. economic growth will likely persist while confronting risks from the federal deficit and Europe’s debt crisis.

“The outlook for recovery continues to be positive,” Hoenig said today in a speech in Ada, Oklahoma. “There are risks in this fragile recovery.”

The Fed last week completed $600 billion of Treasury purchases to spur the economy and reduce unemployment after policy makers said temporary forces are inhibiting growth, including energy prices and disruptions in the supply of goods after Japan’s earthquake.

The Federal Open Market Committee also voted on June 22 to maintain its record stimulus, affirming its pledge to keep the main interest rate near zero for an “extended period.”

“ We are not the only part of the world having economic difficulties,” Hoenig said at the Chickasaw Nation Community Luncheon. “Europe is under pressure. Their banking industry is under pressure.”

“Can you really understand why a country like Greece, which geographically is about the size of Oklahoma, is holding the world hostage right now on financial stability issues?” Hoenig said. “We know it is fragile if we have that going on.”

The Kansas City Fed official also called on lawmakers to agree on a way to cut the deficit as a prelude to an increase in the $14.3 trillion U.S. debt limit. The U.S. Treasury Department has said raising the debt limit is needed by Aug. 2 to avert a default on the nation’s financial obligations.

‘Critical’ Negotiations

“The negotiations going on right now are critical,” Hoenig said. “The interest rate is very low on the debt, and we know that will change as interest rate rise, making the debt problem even more difficult. We need to address that.”

The Kansas City Fed official said the economy has been growing at close to a 3 percent annual rate during the two-year recovery, while the second quarter of this year will be “under 3 percent.”

Hoenig repeated his call for raising the central bank’s target interest rate to 1 percent as part of a normalization of monetary policy reflecting that the recovery is more than two years old.

“ I am not for tight monetary policy,” he said. “I am for nonzero monetary policy” that isn’t “wracked with imbalances and new crises we have to deal with.”

No Vote

Hoenig, who doesn’t vote on monetary policy this year, has repeatedly urged the central bank to tighten monetary policy to limit inflation and avert the emergence of asset price bubbles. He voted eight straight times in 2010 against record stimulus led by Chairman Ben S. Bernanke, tying former Governor Henry Wallich’s record in 1980 for most dissents in a single year.

If the Fed waits until “the imbalances are there or inflation has already broken out,” then policy makers will “have to act as aggressively as we did in the 1980s, with the difficult consequences that come with that,” he said.

Increased U.S. regulation in industries such as banking and health care poses another risk to growth, Hoenig said. “You have to adjust and in the economy that takes time and it tends to slow the recovery,” he said.

Hoenig in March announced plans to retire on Oct. 1 after a 20-year career as leader of the Kansas City Fed. He is required under internal Fed rules to retire at age 65, an age he will reach in September.

To contact the reporters on this story: Steve Matthews at smatthews@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net