Hoenig critical of the Fed’s zero rate policy, says rates should be hiked up

Written on August 26, 2010 – 7:49 am | by Ashley Johnson

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in his remarks seemed critical about the current zero percent rate of the Federal Reserve (link to ). He says that it should be hiked from 0% to 1% and then moving to 2% gradually. This is needed or else it will leave a policy that will only result in financial imbalances in future. He is quoted saying “We need to get off the emergency rate of zero, move rates up slowly and deliberately.”

Recently, the Fed has decided to support the economy by maintaining the size of its balance sheet without allowing it to shrink. The Fed will do this by reinvesting into the Treasury, as well as the proceeds of its mortgage holdings. But this is seen as controversial as many believe that the Fed is just trying to show that they are willing to do something to stabilize the uncertain economy.

Hoenig’s dissent is worrisome as he believes that keeping interest rate at zero will limit the Fed’s flexibility. Also maintaining the balance sheet does not justify the economy now. As a Federal Open Market Committee voter, Hoenig, says that this policy would lead to fresh financial imbalances. He clearly advocates raising the Fed’s interest rates. He is quoted saying “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.”

Though the unemployment rate is high and economic conditions unfavorable, there is a modest ‘recovery’ that is proceeding with mixed results. The GDP is also expected to rise by 3% by year end. The policy maker said, “We are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries.”

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