A lone dissenter on the Federal Reserve’s policy-making committee warned Friday that the central bank’s monetary strategy could backfire and touch off a new boom-and-bust cycle.
Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, dissented on Tuesday when the Federal Open Market Committee voted 9 to 1 to invest proceeds from the Fed’s mortgage-bond portfolio in longer-term Treasury debt. The decision was the Fed’s clearest signal yet that its confidence in the pace of the recovery was waning. “Monetary policy is a useful tool, but it cannot solve every problem faced by the United States,” Mr. Hoenig told local Chamber of Commerce members in a speech at the University of Nebraska, Lincoln.
“In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long.”
Mr. Hoenig added: “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no shortcut.” While Mr. Hoenig’s view is far from the mainstream, the timing of his comments — coming three days after the committee’s vote — signals the difficulties the Fed’s chairman, Ben S. Bernanke, will probably face in forging a consensus on monetary policy especially in a climate that Mr. Bernanke has called “unusually uncertain.”
As president of the Kansas City Fed since 1991, Mr. Hoenig is the longest-serving of the 12 district bank presidents. He is known as an “inflation hawk,” meaning that his foremost concern tends to be preventing inflation, the Fed’s traditional enemy.
Among his allies in that position are several other presidents — Charles I. Plosser of Philadelphia, Richard W. Fisher of Dallas and Jeffrey M. Lacker of Richmond. None of the three currently vote on the Federal Open Market Committee, where 11 of the 12 Fed presidents share four voting seats through an annual rotation. (The New York Fed president is a permanent member.)
Right now, inflation has been running well below the implicit Fed target of around 2 percent — so low that a few committee members fear that the economy could instead be at risk of tumbling into deflation. Deflation is a spiral of declining wages and prices, akin to what Japan has experienced since the 1990s.
“In judging how we approach this recovery, it seems to me that we need to be careful not to repeat those policy patterns that followed the recessions of 1990-91 and 2001,” Mr. Hoenig said. “If we again leave rates too low, too long, out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring.”
