Fed’s Hoenig: too soon to pull support as U.S. recovers
A Federal Reserve official said on Tuesday that while the U.S. economy is clearly rebounding, it is too soon to begin to withdraw the Federal Reserve’s massive support.
“I see nothing that conflicts with the widely held opinion that we are in recovery,” Kansas City Fed President Thomas Hoenig said at an economic conference.
“I would not support a tight monetary policy in the current environment,” Hoenig said in his written remarks.
However, he warned that it will be important for the Fed to pull back from its ultra-low interest rates and withdraw the vast amounts of cash it has put into the financial system before igniting inflation.
“Monetary policy has to think ahead a year, or more,” said.
Hoenig cautioned that benchmark interest rates, which are now near zero, would be accommodative even at 1 percent or 2 percent.
“My experience tells me that we will need to remove our very accommodative policy sooner rather than later.”
Besides cutting interest rates, the Fed has more than doubled the size of its balance sheet as it has sought to pull the United States out of the worst financial crisis since the Great Depression.
DUCK DOUBLE-DIP
The Fed noted in September that the economy may be picking up after a long contraction, but recent evidence of lingering weakness in the labor market raised questions about the pace of the recovery.
Hoenig said government spending and tax relief should complement Fed efforts and prevent the economy from backsliding.
“A vast amount of stimulus has been put in place to spark this recovery, and I believe it will prevent a double-dip recession.”
Hoenig also warned that rising levels of levels of U.S. indebtedness born of ballooning budget deficits and social welfare program costs are unsustainable.
High U.S. debt-to-GDP levels are “long term risk at best,” he said.
One danger would be increasing political pressure on the central bank to monetize the debt by keeping interest rates artificially low.