Sense of Deception

Fed’s Hoenig: Time to ‘Put the Market on Notice’ on Risk

By: Reuters with

A senior U.S. Federal Reserve official said on Wednesday that interest rates kept too low for too long encourage risky financial behavior and recommended raising borrowing costs to prevent another boom and bust.

Thomas Hoenig
Kate Schuler | New AmericaFoundation
Thomas Hoenig

“I am confident that holding rates down at artificially low levels over extended periods encourages bubbles, because it encourages debt over equity and consumption over savings,” Kansas City Federal Reserve Bank President Thomas Hoenig told a group of business people.

“While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust,” he said.

Hoenig is a voter on the Fed’s policy setting panel this year and has dissented against the U.S. central bank’s promise to hold rates exceptionally low for an extended period, arguing it is no longer necessary for the Fed to tie its hands while the economy recovers.

He said on Wednesday the Fed could raise rates to around 1 percent, which would keep borrowing costs at historically low levels while sending a signal that easy money policies put in place during the crisis are steadily being pulled back.

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