The Fed Risks Sowing the Seeds of the Next Crisis, Hoenig

Federal Reserve Bank of Kansas City President Thomas Hoenig told a conference in Kansas City on Thursday, the Central Bank should not wait too long to exit its emergency credit and financial market support programs or risk sowing the seeds of the next crisis.

Reuters: “Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation, and more unemployment — not today, perhaps, but in the medium and longer run,” Hoenig said.

Hoening, who will be a voting member of the FOMC this year, believes the Fed should start tightening monetary policy sooner rather than later. “Maintaining short-term interest rates near zero could actually impede the recovery process in financial markets,” he said.

“While there is considerable uncertainty about the outlook, the balance of evidence suggests that the recovery is gaining momentum.” Hoenig forecast that U.S. GDP would exceed a 3% rate this year. “In these circumstances, I believe the process of returning policy to a more balanced weighing of short-run and longer-run economic and financial goals should occur sooner rather than later,” he said.

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