{"id":1043,"date":"2010-02-07T20:51:55","date_gmt":"2010-02-08T01:51:55","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=1043"},"modified":"2010-02-07T20:52:14","modified_gmt":"2010-02-08T01:52:14","slug":"hoenig-wants-flexible-policy-stance","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2010\/02\/07\/hoenig-wants-flexible-policy-stance\/","title":{"rendered":"Hoenig Wants the Federal Reserve to Adopt A Flexible Policy Stance"},"content":{"rendered":"

On Friday, Nightly Business Report’s Susie Gharib interviewed Thomas Hoenig<\/a>, President of the Federal Reserve Bank of Kansas City. Gharib focused on Hoenig’s objection to the latest Federal Reserve statement on monetary policy<\/a>. Hoenig basically explained that he wants the Fed to adopt a flexible policy stance now that the economy appears to be recovering:<\/p>\n

“…the language should be changed so that we\u2019re not tying ourselves to language that says we won\u2019t do anything for an extended period, when in fact events are changing. The economy is strengthening… what I\u2019m trying to say is maximize your options as a policy maker…what we ought to be doing is very clearly saying that our policies have to have the ability to change as the economy changes.”<\/p><\/blockquote>\n

Hoenig is particularly uncomfortable with guaranteeing that the Fed will carry out any particular course of action after the emergency has apparently passed:<\/p>\n

“…that\u2019s the point of the policy statement. Maximize your options. Be able to respond if the economy is stronger. Be able to hold off if the economy is not stronger. That\u2019s what policy is about. It\u2019s not about saying I guarantee you this or I guarantee you that. It\u2019s about maximum flexibility because we have an economy that is in transition. It is improving, but how fast, people are uncertain about. And when there is uncertainty, you need to have the ability to adjust your policy accordingly and according to new events as they occur.”<\/p><\/blockquote>\n

Ultimately, Hoenig is concerned that the Fed could leave rates too low for too long (he also seemed to imply this is what happened in response to the last recession):<\/p>\n

“I am concerned that we not leave interest rates too low for too long, and that\u2019s my message at this point…I am sure that a zero interest rate is not a sustainable interest rate without having undesired consequences and I want to be able to make those changes when the time is right, when the data assures us that the time is right, and that I think is important.”<\/p><\/blockquote>\n

Hoenig’s explanation of his objection suggests that the Federal Reserve will adopt a more flexible stance before it announces any increase in rates. Since we now know that “extended period” means “at least six months”<\/a>, we can guess that the Federal Reserve will not communicate a more flexible policy for at least another five months or so. Given that the financial markets will be quick to anticipate rate hikes once the Fed changes its statement, I am guessing that the Fed will not adopt a more flexible statement until it is finally ready to hike rates at its next meeting.<\/p>\n

Be careful out there!<\/p>\n

Full disclosure: no positions<\/p>\n","protected":false},"excerpt":{"rendered":"

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