Out of Control Policy Blog

Sane Thinking on Interest Rates

Kansas City Federal Reserve Bank president Thomas Hoenig made his strongest statement yet today on the way the Federal Open Market Committee is handling interest rates. Hoenig, who has a vote in the FOMC this year, has dissented on language in the past several FOMC statements that sent a signal that the federal funds rate would be kept low for an extended period of time. Hoenig after the past few FOMC meetings has said he thinks a change would be best made in the near-term. 

But today, his message sharpened, saying:

"The time is right to put the market on notice that it must again manage its risk, be accountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy.

[...] I am confident that holding rates down at artificially low levels over extended periods encourages bubbles, because it encourages debt over equity and consumption over savings... While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust."

Thank you Mr. Hoenig. According to CNBC he even said that he'd recommend the fed funds rate get bumped up to 1 percent. Not the most aggressive of moves, but then again the FOMC shocking the market wouldn't be the most helpful thing for the economy.

It should also be noted that an exit policy for the Fed doesn't just include moving the federal funds rate, but that the massively bloated Fed portfolio will need to shrink as well.

Anthony Randazzo is Director of Economic Research


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