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Fed’s Hoenig Says “Fed Can’t Do It All, No Reason for Operation Twist to Work”, Focus Should Shift to Fixing U.S. Fiscal Woes

Thu, Aug 25, 2011

Economy and News

From Mish’s Global Economic Trend Analysis

Fed Chairman Ben Bernanke ought to listen to common sense from Kansas City President Thomas Hoenig who says Focus Should Shift to Fixing U.S. Fiscal Woes

Federal Reserve Bank of Kansas City President Thomas Hoenig said there’s a limit to how much more the central bank can help the U.S. economy and that the focus should now be on solving the country’s fiscal problems.

“We can’t do it all,” Hoenig, the central bank’s longest- serving policy maker, said in an interview with Bloomberg Television that airs today. “We have a problem in this country with debt” and “if we don’t turn to the long run, we will be dealing with overnight crises for as far as the eye can see.”

“Monetary policy is an important tool, it is a valuable tool, but it is not an exclusive tool,” Hoenig said in the interview from Jackson Hole, Wyoming, where the Kansas City Fed is hosting the central bank’s annual symposium. Yet “it does not solve all problems.”

Hoenig, who has led the Kansas City Fed since 1991, said he would probably oppose the idea of the Fed taking further action to stimulate the economy. He said he still continues to support the central bank’s dual mandate for achieving price stability and full employment.

The Fed can use monetary policy to “perhaps nudge the economy in the short run,” he said. Yet “whether it has a long-term beneficial effect is of greater debate, something that would have to be debated. I’m not sure more short-run fixes are necessarily good for the economy.”

‘Operation Twist’

When asked whether he would support action like that of “Operation Twist,” the 1961 initiative by the central bank and President John F. Kennedy’s administration to spur growth by lowering long-term rates and keeping short-term ones unchanged, Hoenig told Bloomberg Television, “I don’t see any reason” why it would work.

“What’s the fundamental problem?” Hoenig said. “Is the fundamental problem a yield curve issue? Or is the fundamental problem that the United States and world have too much debt?”

“Would Operation Twist help solve the problem?” he said. “If the answer is yes, go for it. If the answer is no, let’s not.”

Hoenig Interview

Inquiring minds may wish to play the Bloomberg Interview With Hoenig

The opening part of this interview is a bit of cheerleading for the Fed, not started by Hoenig, but by Bloomberg’s Michael McKee.

  • Crises vs Problems: “Crises are dealt with in the moment, problems are dealt with in the long run. We have a problem. It’s time to look to the long run.”
  • Overnight Crises Far as the Eye Can See: “If we do not turn to the long run we will be dealing with overnight crises as far as the eye can see. “
  • On Monetary Policy: “We need to provide an environment where people can make decisions, where price signals mean something. We can’t do it all. Monetary policy is a tool that can’t solve every problem in America or the globe today. The Sooner we turn our attention to to the long-term the more adequate will be the solution.”
  • On Stable Prices: “There is nothing inconsistent with stable prices and full employment. Stable prices is a necessary condition for that [full employment] and when you get away from that you introduce instability into the market.”
  • On Full Employment: “Full employment follows a stable monetary policy and a stable fiscal policy. That’s an outcome, not an input”. Michael McKee “Can you target unemployment with monetary policy?” Hoenig “No, I don’t think you can and I don’t think you should.”
  • On Savings Rate: “One of the things in this country we have don’t for two decades now, we’ve consistently consumed more than we produced. That is not sustainable. We had a savings rate that was allowed to go to zero, that is not sustainable.”
  • On Policy Choices: “So what are the policy choices going to be to over time allow our economy to become rebalanced, to produce more, to better balance ourselves with the rest of the world?”

This was a stunning interview, far better than anyone might have ever hoped for from a Fed Governor. Bernanke should listen, but he won’t. Congress should hear, but they won’t. Obama should listen but he won’t either.

I would like to hear some political candidates speaking in these exact terms. Sadly other than Ron Paul, most are clueless.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

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Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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