Time for Fed to shrink balance sheet: Kansas City Fed president
Retiring Kansas City Fed Bank President Thomas Hoenig said it's time for the Federal Reserve to shrink its balance sheet from $3 trillion to $1 trillion and raise its federal funds rate towards the one-percent range. "I recognize that these actions are not simple to implement," he said during a speech at the London School of Economics in England. "They would impact different economic sectors differently and to varying degrees. They involve trade-offs in their effects and uncertainty about the short-term reactions of financial markets and the real economy." But Hoenig warns a long-winded accomodative monetary policy "undermines market discipline and encourages speculative activities." Ever since the Fed enacted QE2 last November -- an economic initiative that green lighted the Fed's purchase of $600 billion in Treasury debt -- Hoenig has functioned as voice of dissent. He officially announced his retirement from the Fed earlier this month. "As the recovery continued into the spring, I judged that the Federal Reserve should gradually shrink its enlarged balance sheet with minimal market disruption by disposing of mortgage-backed securities that were trading in the market at a premium," he said. "Thus, I voted against replacing maturing MBSs with similar or other securities. Finally, in the fall, I questioned the long-term benefits of further easing monetary policy during a recovery – and I voted against QE2." He said Wednesday his "view has not changed" and he worries if the "current policy remains in place, we almost certainly will stimulate the growth of asset values and inflation. This may temporarily increase GDP and employment, but in the long run, we risk instability, damaging inflation and lost jobs, which is a dear price for middle and lower income citizens to pay." Write to Kerri Panchuk.