Federal Reserve Bank of Kansas City President Thomas Hoenigsaid the central bank is “monetizing debt” with its purchases ofU.S. Treasuries, a program that he says may spur inflation.
“Yes, we are monetizing debt,” Hoenig said today in a speech inNew York. “You buy bonds and you monetize debt. Right now, a lot of that is going into excess reserves so it is not having an immediate effect on inflation. It will initiate inflationary impulses. It takes time.”
Hoenig, the lone dissenter from every Fed meeting last year, warned that the central bank’s near-zero interest rates and record monetary stimulus could lead to asset price bubbles and increase inflation in a few years. He voted against the Fed’s plan to purchase $600 billion in U.S. Treasury securities through June during the final two meetings of 2010.
Hoenig told the Council on Foreign Relations the Fed needs to explain how it plans to reduce its record $2.54 trillion balance sheet. While he would avoid “shock therapy” of selling assets all at once, “we want to begin to show how we will withdraw that.”
Policy makers were divided over whether further evidence of a strengthening recovery would warrant slowing or reducing the $600 billion of purchases, according to minutes of their January meeting.
Philadelphia Fed President Charles Plosser, Richmond Fed President Jeffrey Lacker and St. Louis’s James Bullard have urged a review of the purchases in light of a strengthening economy and concern over future inflation. Hoenig currently doesn’t have a vote on the Federal Open Market Committee.
Target Rate
The central bank should raise the target federal funds rate to 1 percent from near zero rather than ease during the current economic recovery, Hoenig said, reiterating comments from last year.
“You really need to get off of zero, in my opinion,” Hoenig said. “I would think of moving back to 1 percent, and then I would pause. Let the market settle out” and then move to a higher rate, possibly 2 percent.
The Kansas City Fed leader also urged breaking up the largest banks, which he said have a lower cost of funds because of an implied government safety net. He would restore the barrier between commercial and investment banking.
“I think this is a good idea as they are so large they cannot be allowed to fail,” Hoenig said.
Hoenig also said standards for bank capital need to be raised further, and the Basel Committee on Banking Supervision’s overhaul of standards may not go far enough in reducing leverage.
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