Thomas Hoenig, a voting member of the Fed’s interest rate decision body, the Federal Open Market Committee (FOMC), has on several occasions expressed concerns about the direction of U.S. monetary policy. During the last year, he has been a lone voice of dissent at FOMC meetings.
This weekend’s Wall Street Journal features an interview with Hoenig in which he points to the dangers of low interest rates:
“when you have an extended period of time with very low interest rates . . . those are some of the necessary conditions that will enable very rapid credit expansion leading to bubbles, perhaps. At least the likelihood of bubbles is greater under those circumstances.”
“The decade of the ’70s and the decade of the 2000s were the periods in which we had, over 40% of the time, negative real interest rates. The consequence of that was bubbles, high leverage and financial crisis.”
“Monetary policy has to be about more than just targeting inflation. It is a more powerful tool than that. It is also an allocative policy, as we’ve learned. In other words, when we kept interest rates unusually low for a considerable period we favored credit and the allocations related to it over savings, and we created the conditions that I think facilitated a bubble.”
Hoenig thinks monetary policy should be more concerned with long run stability than short run fixes:
“we’ve gotten through the crisis. We are not out of the woods, the economy isn’t booming, but we are now in a position where we ought to be thinking about the long run. That’s what central banks should do.”
“We need a more normal set of circumstances so we can have an extended recovery and a more stable economy in the long run.”