The Federal Reserve risks creating a speculative bubble in the economy and reawakening long-term inflation with its easy-money policies, Fed governor and dissident Thomas Hoenig said Tuesday in Denver.
“I’m not saying when the next bubble will be, but I do see conditions that are at least agreeable to the creation of bubbles, and that is the risk we face,” Hoenig said in a speech to the National Association for Business Economics meeting. The president of the Federal Reserve Bank of Kansas City, which oversees the Denver branch, sits on the interest-rate-setting Federal Open Market Committee.
He criticized the Fed’s policy of holding short-term interest rates near zero and its plan to begin buying 10-year Treasury bonds to lower long-term rates and stimulate the struggling economy.
That plan would have little impact on the economy, Hoenig said. But it would increase the risks of inflation and speculative bubbles — when asset prices rise sharply above real values and create the danger of a crash as happened in the housing market, he said. There’s already enough liquidity available to businesses, he said.
“With a modest recovery underway and inflation low and stable, I believe the economy would be better served by beginning to normalize monetary policy,” Hoenig said.
Hoenig appears to represent a minority opinion on the Fed board, which is poised to begin buying up to $500 billion in Treasury bonds as soon as next month.
He pointed to the 1960s and 1970s, when inflation rose from under 2 percent to double digits as the Fed pursued low interest rates to stimulate employment.
“When you take it out forward five to 10 years, I think there is an issue of inflationary impulses you’re going to have to deal with,” he said. “That’s how inflation works. It’s slow, insidious and persistent when you push enough . . . liquidity into the system.”
Jim Bicksler, a finance and economics professor at Rutgers University in New Jersey who attended the Denver conference, said Hoenig’s message is important.
“The Fed is keeping rates so low they don’t reflect reality,” he said. “When can you think of a product market in which people give away things?”
Even those who disagree with Hoenig said they respect his opinion. Some have criticized the Fed for allowing internal debates to be aired publicly.
“I agree with him that we need to be concerned about the long-term consequences,” said Wells Fargo Securities senior economist Mark Vitner. “Somebody has to say it. You’re not going to hear that from Congress.”
