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MNI INTERVIEW: Hoenig: Fed's Easy Money Trap Adds Market Risk
--Ex-Kansas Fed President Sees Steady Rates This Year
By Pedro Nicolaci da Costa
WASHINGTON (MNI) - The Federal Reserve won't be able to reverse ultra-easy
monetary policies for at least a decade, adding risk to the financial system,
former Kansas City Fed President Thomas Hoenig told MNI.
The Fed is getting stuck in a world of ample bank reserves and extensive
bond purchases in a financial system already characterized by excess leverage,
Hoenig said in an interview. Hoenig also saw little chance the Fed will move its
policy rate this year.
"Now QE is the policy tool -- they're trapped and I don't see how they're
getting out of it anytime soon," he said. "It will take at least a decade if not
more" to reverse those policies, he said.
The Fed halted efforts to reduce its balance sheet in September after a
repo market squeeze and switched to an ample reserves policy. The balance sheet
has expanded nearly half a trillion dollars in the last few months and equity
prices have soared to new highs. Investors have questioned whether the policy is
an indirect form of QE and the Fed has laid out no clear plan to move out of the
the kind of "trap" Hoenig is worried about.
"The dust-up with the repo market kind of demonstrated that," policy
dilemma, Hoenig said.
--FED ON HOLD
The Fed's balance sheet is USD4.2 trillion compared with less than USD1
trillion before the last downturn. Some Fed officials have argued the economy's
growth over the last decade justifies much of the growth in the balance sheet.
Hoenig, also former vice chair of the Federal Deposit Insurance
Corporation, said the Fed may have made an earlier policy miscalculation by
underestimating the tightening impact of a shrinking balance sheet and higher
official borrowing costs.
Forced to reverse course and cut rates three times last year, the Fed now
intends to stand pat if at all possible, a path Hoenig views as wise.
"They certainly should try to keep rates where they are for now," he said.
"I wouldn't lower them, if they saw a temporary slowdown. If the economy slows
too much they will initiate further quantitative easing."
The bar for a resumption of interest rate hikes is even higher, Hoenig
said: "I don't think they're going to be raising them until or unless inflation
really breaks out above the 3% to 3.5% mark."
Inflation is not showing up in consumer prices but Hoenig worries about
asset price inflation. Higher stock and bond prices pose a danger to financial
stability and can boost inequality since those gains flow mostly to the wealthy.
Another reason the Fed may be stuck with easy money for a long time is
because Hoenig said there will likely be little change from the Fed's framework
review. Policymakers would have begun signaling any major changes to the Fed's
2% inflation target system well ahead of a possible mid-year announcement, he
--MNI Washington Bureau; +1 202 371 2121; email: firstname.lastname@example.org
--MNI Ottawa Bureau; +1 613-314-9647; email: email@example.com
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