Although some within the real estate industry are happy to see short-term interest rates remain near zero, Federal Reserve Bank of Kansas City president Tom Hoenig expressed concern in a Denver news article that current system is only fueling economic uncertainty. In fact, at a recent town hall meeting held in Lincoln, Nebraska, Hoenig warned that the current policy should not be viewed as a cure-all to our country’s economic troubles. Further, he cautioned that maintaining low interest rates for too long could potentially lead to another recession along with high unemployment.
“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,” said Hoenig, whose Fed district includes the state of Colorado. “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.”
As a member of the Federal Open Market Committee (FOMC),which is the policy-making body for the Federal Reserve System’s Board of Governors, Hoenig has been the only critic of the committee’s decision to keep the rate at such a low level. With the committee’s decision to keep the rate the same, it remains at the lowest level it has been in 65 years.
With the federal funds rate being the main tool the Fed utilizes to control the economy, Hoenig argues that maintaining such as low rate is no longer necessary. Although he acknowledges that the economy still faces many challenges, he maintains that it is improving. Similarly, while job growth is still less that desired, 630,000 jobs have been created since the beginning of the year. Furthermore, Hoenig reports that personal income levels are up by 2.8 percent and consumption is up 1.6 percent. Additional signs of an improving economy include the fact that housing is up by 5.3 percent and investment in equipment and software is up by 15 percent. High tech is also up by 20 percent, industrial production is up by 8.2 percent and corporate profits are up by 57 percent when compared to the fourth quarter in 2008.
“A zero policy rate during a crisis is understandable, but a zero rate after a year of recovery gives legitimacy to questions about the sustainability of the recovery and adds to uncertainty,” said Hoenig. “of course, the market wants zero rates to continue indefinitely: They are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.”
Hoenig goes on to say that he feels the FOMC can still achieve its goals by increasing the rate to 1 percent and removing the guarantee of low rates while also letting the market know that risks need to be accepted if the market wishes to earn a return.
“We need to get off the emergency rate of zero and move rates up slowly and deliberately,” said Hoenig. “This will align more closely with the economy’s slow, deliberate recovery so that policy does not lag the recovery.”
