Federal Reserve Bank of Kansas City President Thomas Hoenig said there’s a limit to how much more the central bank can help the U.S. economy and that the focus should now be on solving the country’s fiscal problems.
“We can’t do it all,” Hoenig, the central bank’s longest-serving policy maker, said in an interview with Bloomberg Television that airs today. “We have a problem in this country with debt” and “if we don’t turn to the long run, we will be dealing with overnight crises for as far as the eye can see.”
The regional bank chief, 64, joined colleagues like Dallas Fed President Richard Fisher by saying monetary policy can’t be expected to cure all that ails the economy, and shouldn’t be used to target high unemployment. Hoenig, who doesn’t vote on the Federal Open Market Committee this year, said it probably isn’t “a surprise” to learn that he would have dissented against the FOMC’s Aug. 9 decision to keep rates near zero through at least mid-2013.
“Monetary policy is an important tool, it is a valuable tool, but it is not an exclusive tool,” Hoenig said in the interview from Jackson Hole, Wyoming, where the Kansas City Fed is hosting the central bank’s annual symposium. Yet “it does not solve all problems.”
Fed policy makers have tried to spur growth by holding the target for the overnight lending rate between banks near zero since December 2008, and by expanding the central bank’s balance sheet to more than $2.8 trillion.
Fisher was one of three regional bank presidents to dissent at the Fed’s most recent meeting this month, posing the most opposition on the FOMC in almost 19 years. The Dallas Fed head joined Charles Plosser of Philadelphia and Narayana Kocherlakota from Minneapolis in preferring to maintain a commitment to keep rates low for an unspecified “extended period.”
Hoenig, who has led the Kansas City Fed since 1991, said he would probably oppose the idea of the Fed taking further action to stimulate the economy. He said he still continues to support the central bank’s dual mandate for achieving price stability and full employment.
“The mandate is quite fine,” Hoenig said. “We need to follow the mandate.”
The issue is that “we do have a lot of debt in this country, we need to work it off, and that will take time,” he said. “Not having a solution to fiscal policy and having an environment where businesses are unsure of what the future will hold has its own constraining effects on the economy.”
“One of the important issues for the U.S. economy today is the debt load” being carried by U.S. consumers, state governments and federal authorities, Hoenig said in a separate interview with Bloomberg Radio.
Claims for U.S. unemployment benefits unexpectedly rose last week, while consumer confidence stabilized at a level near an all-time low. Stocks fell, with the Standard & Poor’s 500 Index declining 1.6 percent to 1,159.27 at the 4 p.m. close in New York.
The Fed can use monetary policy to “perhaps nudge the economy in the short run,” he said. Yet “whether it has a long-term beneficial effect is of greater debate, something that would have to be debated. I’m not sure more short-run fixes are necessarily good for the economy.”
Failing to lift the benchmark interest rate from near-zero levels, and failing to have a U.S. fiscal policy that takes into consideration long-term debt and revenue issues, puts the economy at risk, Hoenig said. “We need to be seriously thinking about bringing those back into line.”
When asked whether he would support action like that of “Operation Twist,” the 1961 initiative by the central bank and President John F. Kennedy’s administration to spur growth by lowering long-term rates and keeping short-term ones unchanged, Hoenig told Bloomberg Television, “I don’t see any reason” why it would work.
“What’s the fundamental problem?” Hoenig said. “Is the fundamental problem a yield curve issue? Or is the fundamental problem that the United States and world have too much debt?”
“Would Operation Twist help solve the problem?” he said. “If the answer is yes, go for it. If the answer is no, let’s not.”