Fed’s Hoenig: Rates Need to Rise

The U.S. economy is recovering and the Federal Reserve needs to raise interest rates, lest it leave in place a policy that will only fuel future financial imbalances, Federal Reserve Bank of Kansas City President Thomas Hoenig said Friday.

“We need to get off of the emergency rate of zero, move rates up slowly and deliberately,” which will bring policy in better alignment “with the economy’s slow, deliberate recovery,” the official said. While the markets may like the current stance of monetary policy, 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.”

Hoenig’s remarks — they came from the text of a speech to be delivered Friday before a meeting with the community in Lincoln, Neb. — came on the heels of his latest dissent against the consensus view of the Fed.

On Tuesday, the Fed decided to provide additional support to an economy whose recovery appears to be faltering, by deciding to maintain the size of its balance sheet, rather than letting it slowly shrink. The Fed will do this by reinvesting the proceeds of its vast mortgage holdings back into Treasurys.

The action is controversial. Its economic impact is uncertain and some felt the Fed took the step simply to show to markets they were willing to do something given the economy’s problems.

Hoenig has been a persistent critic of the Fed’s stance throughout his tenure this year as a voter on Federal Open Market Committee. He has fretted that the current stance of policy could give way to fresh financial imbalances. His confidence in the recovery has led him to advocate raising interest rates, as well.

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H/T Brian (an old friend)