By Brai Odion-Esene
WASHINGTON (MNI) – The task of tackling the sluggish pace of the
economic recovery has now fallen to U.S. fiscal authorities rather than
the Federal Reserve, as further action by the central bank would only
result in short-term gains and would have long-term consequences, Kansas
City Federal Reserve President Thomas Hoenig said Thursday.
“I don’t think creating problems in the future, as we try and take
shortcuts in the short-run are any way to really take care of it over
the next generation,” Hoenig said in an interview on CNBC.
Asked to comment on the likelihood the Fed might engage in
additional quantitative easing to boost a flagging recovery, Hoenig said
he does not think more monetary stimulus will be useful.
“My view is that I did not support QE2 and would not support QE3,”
“We’ve pumped enormous reserves into the system … the issues are
around debt and leverage, the issues are around the uncertainty with the
budget crisis that we are facing and we really need to address those
issues and then the economy, I think, can begin to heal,” Hoenig said.
This is a belief shared by other Fed officials on the policymaking
Federal Open Market Committee that have spoken out against additional
QE3 opponents like Dallas Federal Reserve Bank President Richard
Fisher argue that the central bank has pumped enough liquidity into the
banking system, and it is now time for lawmakers to step into the
“It would do much better if we bring greater certainty around our
economy but QE3 won’t accomplish that goal,” Hoenig said.
Hoenig repeated his opposition to the Fed’s current monetary
policy, saying “I don’t think zero is the right policy.”
He argued that the credit markets cannot run efficiently with
interest rates at zero, but added that the move away from the
historically low rates should be done gradually.
In order to avoid shocking the economy, the first step should be to
remove the “extended period” language from the FOMC’s monetary policy
statement, Hoenig said, “and very carefully let the markets know that we
can’t stay at zero indefinitely.”
The next step would be to move the Fed funds rate back to 1% over a
period of time while keeping a close eye on the economy, he added.
This would all be done based on the assumption that Congress will
begin to address the U.S. fiscal situation as well as the slowing
recovery. Raising interest rates above 1% would then occur “as the
economy allows,” Hoenig said.
Asked if the Fed is prepared for the possibility that Congress
might miss the August 2 deadline to raise the debt ceiling, Hoenig
stressed the importance of lawmakers reaching an agreement.
“It’s very important that we take care of this issue so that it
doesn’t put pressure on the central bank to enable this to go on
indefinitely,” he said, “so my view is that we need to settle this.”
Hoenig warned that if Congress fails to act in a timely manner, it
will create more uncertainty and adversely impact the economy.
In a report Thursday, ratings agency Standard & Poor’s said it
believes it is unlikely that the Fed “would sit on its hands” if
inaction by fiscal authorities destabilized the recovery.
“If an aggressive dose of austerity hurts growth and brings back
the risk of deflation — or if market liquidity begins to dry up — we
think the Fed would likely step in to provide support to the markets and
offer another round of quantitative easing,” S&P said.
** Market News International Washington Bureau: 202-371-2121 **