Federal bank's KC prez warns against low rates

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Posted: Oct 18, 2010 7:37 PM
Federal bank's KC prez warns against low rates

The president of the Federal Reserve Bank of Kansas City said Monday that keeping interest rates too low for too long would not be in the best long-term interest of the economy.

Thomas Hoenig, who's been the bank's president for 20 years, has been a critic of the Federal Reserve maintaining interest rates at record lows, saying that doing so could lead to inflation or create speculative bubbles.

He opened a speech at Oklahoma City University by making his stance clear.

"I am not at all in favor of high interest rates," he told an audience of economists, professors, students and business executives. "I am in favor of non-zero interest rates. There is a big difference."

He said that zero interest rates do not make good business sense and will make it harder to recover from the recession in the long term. His comments echoed those he has made in recent months, both during Federal Reserve meetings and in speeches. Hoenig serves on the Federal Open Market Committee, which sets interest rates.

The reduction of interest rates to 1 percent during the summer of 2003 led to several quarters of good growth, he said, but "the outcome of that boom was a real robust crash." Hoenig said that in hindsight, interest rates should not have been as low as they were for as long as they were.

"We all would have been better off for it," he said.

He didn't address the level at which he believes interest rates should be, saying "that is an area for the Treasury."

Hoenig said the recession could have created "some structural unemployment" in the U.S. but he declined to say how much, only that it was between 4.5 percent and 9.6 percent, the nation's current unemployment rate.

"There is room for the unemployment rate to come down in this country and I very much want it to," he said. "But I want it to come down in a lasting fashion."

Hoenig spoke at OCU at the behest of Steve Agee, an economics professor at the university and the chairman of the Oklahoma City Branch of the Federal Reserve Bank of Kansas City.

Agee and other economists have said Oklahoma didn't feel the brunt of the recession as much as other states, in part because of conservative banking and business attitudes developed after the oil bust of the 1980s, which devastated Oklahoma's economy.

"I think that's what President Hoenig is trying to convey," Agee said. "You need moderation in anything."

The 10th Federal Reserve District, based in Kansas City, Mo., covers Kansas, Nebraska, Oklahoma, Wyoming, Colorado, northern New Mexico and western Missouri.