Fed Official: It's Time For Rates To Go Up

Originally published on July 14, 2011 6:56 am
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Thomas Hoenig is president of the Federal Reserve Bank of Kansas City, and he is not signing on to the conventional wisdom.

THOMAS HOENIG: I asked the question what good, what service, what transaction can take place at a price of zero? And that's a hard question for people to answer because none is the right answer and I think that also applies to credit, even short-term credit.

INSKEEP: But let's talk about what the idea is for near-zero interest rates, as explained to the public, that you have obviously a shortage of economic activity, of a lot of people out of work. You want to encourage businesses and others to borrow money and invest money or spend the money, you want to get money moving, and very low interest rates is seen as the most obvious way to do that. What's wrong with that reasoning right now?

HOENIG: Well, it asks(ph) a lot of monetary policy to do that. And it's asking the saver to subsidize the borrower so we can get through this, and I think the savers are willing to do that during the crisis, but now we've moved beyond that and that's an important reason. And when you leave things zero for long periods of time, you create new imbalances in the economy. Now, remember, this crisis that we just went through is because we had a period of very low interest rates, one percent, for a very long period of time. That created a credit bubble. It led to a housing bubble and a crisis. I'm not saying that will happen again, but I do know the conditions that are ripe for a bubble and zero create those conditions. And the longer they remain zero, the greater likelihood we are to create new imbalances that we will have to pay for later.

INSKEEP: Are you saying that maybe two or three years ago you would have been all right with exceedingly low interest rates in an emergency but the emergency's over as far as you're concerned?

HOENIG: Yes. The role of the central bank is to provide enormous liquidity during the immediate crisis. But when the crisis is under control, then you have to restore more normal interest rates, or you endanger your economy for the long-term. And I try and remind people that central banking is about the long-term.

INSKEEP: But right now you've got 9.2 percent unemployment and that's got to seem like a long run to the people who've been out of work for a year or two years.

HOENIG: Of course, and when we did that choice the last time was 2003, and the interest rates were one and a quarter percent and unemployment was six and a half percent.

INSKEEP: Which seemed kind of high at the time.

HOENIG: I think by not looking far enough ahead we've made things worse, and that's what I want to avoid.

INSKEEP: Are the wrong people profiting from zero or near-zero interest rates?

HOENIG: I don't know if it's the wrong people but certainly the financial industry, the largest banks in this country, were in effect bailed out in this crisis.

INSKEEP: Mm-hmm.

HOENIG: And interest rates are very low, therefore they can borrow at a quarter and they can reinvest in government bonds at little less than three percent, 10 years. And that's a pretty nice profit, if you will, for no risk, and it does help rebuild their capital. So yes, they are benefiting from this. Now, the saver, who would like to put their money in a CD, a retired party who have saved all their life, wants to maintain their standard of living over time, is getting .2 percent on their CDs or .3 or whatever it is. So yeah, we're redistributing wealth in this country around interest rates.

INSKEEP: So granting that you want to think about the long-term, there is this problem of 9.2 percent unemployment. Do you as a central banker essentially saying not my business?

HOENIG: No. If I thought that I could bring everyone back into the job market and reduce and eliminate unemployment, I'd leave the interest rate zero forever. But monetary policy as a tool is limited in that. And when you try and use it for more than it is designed for, which is stable prices and a stable economy over a long period of time, if you try and use it to solve every problem, you create problems.

INSKEEP: Why do you think so few of your colleagues at the Fed go along with your reasoning on this?

HOENIG: I think that there is a desire always to do - and the intentions are good. And I have a longer experience. I've been president of this bank for 20 years and involved in the crisis of the '80s as an official in the bank. So you look at the data and you look at the time horizons and you come to different conclusions, and they have come to a different conclusion than I have.

INSKEEP: Thomas Hoenig, thanks very much.

HOENIG: You're very welcome. Good to be with you.

INSKEEP: A counterpoint from Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. Transcript provided by NPR, Copyright NPR.