Economy

KC Fed chief: Low interest rates holding back recovery

The Federal Reserve's zero-interest-rate policy amounts to a "dangerous gamble" that may be holding back the recovery and risking a repeat of the financial crisis that put us here, the president of the Federal Reserve Bank of Kansas City said Friday.

Thomas Hoenig, who serves on the Federal Open Market Committee that sets interest rates, has dissented repeatedly this year against the Fed's stand-pat rate policy that has kept rates at record lows for two years. His latest dissenting opinion came Tuesday when he broke from the Fed's decision to take an unconventional step to strengthen the recovery by buying government bonds.

On Friday, Hoenig reiterated his concerns about the central bank's economic strategy, but this time his dissent was more sharply worded. In remarks at a town hall-style meeting in Lincoln, Neb., Hoenig said the economy still needed the support of low rates, but he stressed again that keeping rates too low for too long could create problems now and later.

"Rather than improve economic outcomes, I worry that the FOMC (Fed policy committee) is inadvertently adding to 'uncertainty,' " said Hoenig, president of the Kansas City Fed since 1991 and the longest-serving of the Fed's 12 district bank presidents.

His remarks drew criticism for coming three days after the Fed policy meeting and adding to the difficulties that Fed Chairman Ben Bernanke could face in maintaining his monetary policy.

Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn., called Hoenig's speech "a scathing critique of monetary policy now and over the last 10 years."

Hoenig said low interest rates and lax regulation during a deflation scare in 2003 helped bring about the debt-driven boom and subsequent financial collapse. And the Fed is risking a future crisis.

"If we again leave rates too low too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring," Hoenig said.

The right step, he said, would be to announce a schedule for lifting the Fed's interest rate target to 1 percent, and then to 2 percent, assessing along the way how well the recovery has progressed.

"We need to get off of the emergency rate of zero, move rates up slowly and deliberately. This will align more closely with the economy's slow, deliberate recovery so that policy does not lag the recovery," Hoenig said.

Read more of this story at KansasCity.com

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