–‘Unrealistic’ to Expect Sharp Decline in Unemp in Just a Few Quarters
–Should ‘Calibrate’ Monetary Policy With Economic Recovery

By Brai Odion-Esene

WASHINGTON (MNI) – Kansas City Federal Reserve Bank President
Thomas Hoenig Wednesday said the Fed’s focus on short-term issues like
unemployment over long-term management of monetary policy, increases the
risk of negative unintended consequences for the economy.

While the economy is improving, it is not realistic to expect the
unemployment rate to experience a sharp decline in just a few quarters,
Hoenig said.

Taking questions following a speech at a Women in Housing and
Finance event, Hoenig said, “You have to calibrate monetary policy with
the recovery and the economy so that you don’t overshoot and cause the
next crisis.”

The unemployment rate is coming down more slowly for various
reasons, but rather than keeping rates low for a long time and then
hiking sharply when conditions improve — and “shocking the economy to
death” — monetary policy should be normalized carefully in step with a
gradual drop in the unemployment rate, he said.

“Isn’t that a better solution in the long run? … That’s why you
have to be thinking of monetary policy as a long-run instrument. And it
has some intended effects, and unintended effects,” Hoenig said.

If it is rushed, “you will increase the likelihood of very negative
unintended consequences,” he warned.

Hoenig also repeated the stance he adopted during his time as a
voting member of the Federal Open Market Committee last year, saying
“you shouldn’t tell the market that you have exceptionally low interest
rates for an extended period of time,” as that would encourage increased
speculation.

Current monetary policy “is encouraging an asset buildup that at
some point will have to correct,” Hoenig warned.

Instead, he said monetary policymakers have to focus on the
long-term. “We need to think about not just next quarter but three
years, four years from now.”

Asked for his thoughts on the Obama administration’s proposal to
overhaul housing finance, Hoenig saying re-privatizing the housing
finance system over the long-run “is the right way to go.”

Reducing the government’s support of housing market will not reduce
the percentage of home ownership, he said, noting similar conditions
exist elsewhere in the world.

Once the correction in the housing market is complete, “We need to
allow for Fannie and Freddie to, over time, disappear,” Hoenig said.

In his speech, Hoenig said he existence of too-big-to-fail
financial institutions poses “the greatest risk” to the U.S. economy,
and big banks must be broken up to end the cycle of government bailouts.

“For me, the answer is firm: they must be broken up. We must not
allow organizations operating under the safety net to pursue high-risk
activities and we cannot let large organizations put our financial
system at risk,” Hoenig declared.

“We should vigorously pursue the restructuring of these firms in a
manner that mitigates risk and that would influence the size and
complexity of these firms,” the Kansas City Fed chief added. “That is,
we must expand the Volcker Rule and carve out business lines that are
not essential to the basic business of commercial banking or consistent
with public safety nets and then require that these lines be spun off
into separate firms.”

“We must make sure that large financial organizations are not in
position to hold the U.S. economy hostage,” he said.

** Market News International Washington Bureau: 202-371-2121 **

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