Money Matters - Simplified

Fed dissenter speaks up in Nebraska

Lincoln, Neb. -- President of the Federal Reserve Bank of Kansas City Thomas Hoenig said Friday that the Federal Reserve Bank was risking setting off a second recession.

"Monetary policy is a useful tool but it cannot solve every problem faced by the United States," said Hoenig at an open meeting in Lincoln, Neb., The New York Times reported.

"In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long," he said.

At the Fed's Open Market Committee meeting Tuesday, Hoenig was the lone dissenter in a 9-1 policy vote that kept bank lending rates at zero to 0.25 percent and set up a program for the Fed to pump its earnings from its Treasury holdings -- about $10 billion per month -- back into the economy by purchasing more Treasury securities.

In Lincoln, Hoenig said, "I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth but there is no short cut."

In part, Hoenig said businesses should learn to take risks, again. The way to do that is to tighten monetary policy -- raising lending rates, which would also slow inflation, should it come barreling back in the future.

"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," he said.

Copyright 2010 United Press International, Inc. (UPI).

No votes yet