Fed’s Hoenig Says Operation Twist Adds to Risk of Economic ‘Imbalances’

Federal Reserve Bank of Kansas City President Thomas Hoenig said the Fed’s plan to push down long- term interest rates may produce accidental outcomes and policy makers risk creating “imbalances” in the economy.

“I have real concerns about trying to fine-tune and micro- manage the economy when monetary policy is a blunt tool,” he said today in an interview with Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. Efforts to “redefine yield curves” may “introduce new complexities and risk new unintended consequences,” he said.

Hoenig steps down as the central bank’s longest-serving policy maker this week, after serving as a regional chief since 1991. The Federal Open Market Committee is debating how to jump- start the U.S. economic recovery, with three members casting dissents at each of the past two meetings and posing the most opposition in almost 19 years.

“We risk further imbalances,” said Hoenig, 65, who doesn’t vote on the FOMC this year. “We ought to be very, very humble in our expectations of what we can do with this instrument we call monetary policy.”

Data released this week show confidence among U.S. consumers stagnating near a two-year low this month, and property values in 20 U.S. cities falling 4.1 percent in July from a year earlier. By contrast, orders for U.S. capital goods climbed in August by the most in three months, a sign business investment continues to support the recovery, according to a Commerce Department report today.

Operation Twist

Under the plan announced last week, the central bank will replace $400 billion of short-term debt in its portfolio with longer-term Treasuries maturing in six to 30 years, aiming to reduce borrowing costs and spur the recovery of the world’s largest economy. The plan, dubbed Operation Twist by economists and announced after policy makers’ Sept. 20-21 meeting in Washington, gets its name from a similar action in 1961.

Hoenig’s concerns about Operation Twist are shared by colleagues such as Dallas Fed President Richard Fisher, who said yesterday that the move may prove ineffective and hurt job creation. Boston Fed President Eric Rosengren said yesterday that he is ‘very supportive” of the program.

The Kansas City Fed chief rejected an idea posed by Chicago Fed President Charles Evans, who suggested policy makers tolerate higher inflation for some time in order to bring down unemployment.

“That is a terrible policy,” Hoenig said. “I just can’t believe that we would think that as economists.”

‘Exceptionally Low’

As a voting member of the FOMC last year, Hoenig dissented against the Fed’s pledge to keep rates “exceptionally low” for “an extended period,” the decision to reinvest proceeds from maturing mortgage-backed securities, and a $600 billion round of bond purchases. His eight straight dissents tied former Governor Henry Wallich’s record in 1980 for most dissents in a single year.

The Kansas City Fed named Esther George, its No. 2 official, this month to succeed Hoenig. She is scheduled to vote on monetary policy in 2013.

To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net; Kathleen Hays in New York at khays4@bloomberg.net

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

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