The Federal Reserve is undertaking a “dangerous gamble” by keeping rates at near zero for so long, and must start raising rates or risk damaging the nascent U.S. recovery, a top Federal Reserve official said on Friday.
“To be clear, I am not advocating a tight monetary policy,” Kansas City Reserve Bank President Thomas Hoenig said in the text of a speech to the Lincoln, Nebraska, Chamber of Commerce. “I am advocating a policy that remains accommodative but slowly firms as the economy itself expands and moves toward more balance.”
Hoenig has been the lone dissenter on the Fed’s policy-setting panel, which on Tuesday repeated the U.S. central bank’s pledge to keep interest rates extraordinarily low for an “extended period.”
The Fed took the further step of saying it would begin reinvesting cash from maturing mortgage bonds to buy more government debt. The decision reflected the Fed’s concern over the slowdown in the economic recovery it helped bring about by cutting rates to near zero in December 2008 and buying nearly $1.3 trillion in mortgage-linked debt to shore up the housing market.
However, Hoenig said Friday he believes the economy “barring specific shocks and bad policy …should continue to grow over the next several quarters.”
The Fed should raise its short-term target to 1 percent, pause to wait for the economy to adjust, and then raise it to 2 percent once it is clear the recovery is on a reasonable growth path, he said, repeating a proposal he has made before.
“I believe that zero rates during a period of modest growth are a dangerous gamble,” Hoenig said Friday.
No Fan of Zero
This week, Hoenig dissented for a fifth straight meeting from the vow to keep rates low, and said he believed the economy did not need further help.
“We need to get off of the emergency rate of zero, move rates up slowly and deliberately,” he said. “This will align more closely with the economy’s slow, deliberate recovery so that policy does not lag the recovery.”
U.S. central bank policies weren’t the only targets of Hoenig’s criticism. Hoenig also expressed doubt that international and domestic policies designed to prevent another financial crisis will be effective.
Internationally, the Basel Committee, which is working on new global banking standards, has agreed to establish capital-to-asset ratios for the largest global banks at levels that leave too small a margin for error, he said.
“It is a level of risk that I judge unacceptable,” he said.
Recent Wall Street reform in the U.S. to tighten financial regulation will only be successful to the extent that authorities implement the new law well, he said.
A newly created consumer bureau will bring benefits only if its resources are directed toward payday loan providers and other financial institutions that are currently underregulated, he said.
And the part of the law designed to end the need for fresh government bailouts of failed financial institutions may not work because it requires a complex set of steps that will be cumbersome to put into effect, he said.
“In a crisis …you tend to provide the liquidity and worry about whether it is in default or is in danger of default later,” he told the audience.