Fed’s Hoenig: Low rates can lead to bubbles – WSJ

WASHINGTON, May 15 (BestGrowthStock) – Keeping interest rates low
for a long time can create ripe conditions for dangerous asset
price bubbles, a Federal Reserve official said in a Wall Street
Journal interview published on Saturday.

Thomas Hoenig, president of the Kansas City Federal Reserve
Bank, said it was “understandable” that the U.S. central bank
cut interest rates to near zero during the financial crisis,
but it was time to at least start reconsidering that stance.

“We’ve gotten through the crisis,” he said. “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.”

Hoenig has dissented at the past three meetings of the
Fed’s policy-setting committee because he is uncomfortable with
the central bank’s pledge to keep rates ultra-low for “an
extended period” of time.

He said keeping rates near zero gave Wall Street banks an
advantage over Main Street because financial firms could borrow
at low rates and lend or invest for bigger returns.

“I can’t guarantee the carpenter down the street a margin.
I really don’t think we should be guaranteeing Wall Street a
margin by guaranteeing them a zero or near zero interest rate
environment,” he said.

The Fed has said that its low-rate pledge will stand as
long as the economy is weak, unemployment high, and inflation
low. But Hoenig said monetary policy “has to be about more than
just targeting inflation.

“It is a more powerful tool than that.”

He also said Greece’s debt crisis was a lesson for the
United States, which has its own massive debt pile that could
eventually drive up interest rates if creditors grow
uncomfortable with cheaply financing large deficits.

“We shouldn’t be so, if I may say, arrogant to think that
that couldn’t happen to us or others,” he said. “We’re
fortunate, we’re a much bigger economy and we’re the reserve
currency.”

He said U.S. deficits were not sustainable, and there could
be pressure on the Fed to print money to pay off debts. If that
happens, “the outcome of that will be a very strong
inflationary bias,” Hoenig said.

Investing
(Reporting by Emily Kaiser; Editing by Eric Walsh)

Fed’s Hoenig: Low rates can lead to bubbles – WSJ