Fed official renews call for higher rates

Reuters

NEW ORLEANS – Kansas City Federal Reserve president Thomas Hoenig renewed his call for the US central bank to raise borrowing costs, saying housing markets cannot follow a sustainable path until the Fed normalises monetary policy.

"Moving rates modestly off of zero, where they have been since December 2008, still represents highly accommodative monetary policy," he told the National Association of Realtors.

He warned that keeping rates low for too long risks fostering a new credit crisis like the one that stemmed from the early 2000s housing price boom.

Mr Hoenig told a questioner afterward that the economy was in a modest recovery that should be given time to develop rather be force-fed with liquidity injections.

"I worry that by pumping in significant amounts of dollars we then build the inflationary pressures for the future, and we do encourage then an easier credit environment that helped create this problem in the first place," he said.

Mr Hoenig dissented against the Fed’s decision on Wednesday to resume efforts to jolt the sluggish economic recovery by buying $600 billion in longer-term government securities, saying he believes the move risks inflation and fuelling a future boom and bust cycle.

The Kansas City Fed president said mortgage finance agencies Fannie Mae and Freddie Mac, which the government took control of at the height of the financial crisis, could not be allowed to operate in the future as they had in the past.

"I support a policy path that returns the housing industry toward greater market discipline and greater long-run stability," he said. "This path requires a greatly reduced role for governmental intervention and public subsidies that have distorted the market over recent decades."

Mr Hoenig said reducing or removing subsidies for housing would be the best way to create a healthy housing market. Subsidies directed toward housing markets have been "extremely inefficient," he said.

One way to reform mortgage finance might be to establish public entities whose only job is to securitize mortgages, making the government no more than a conduit for mortgage finance, mr Hoenig said.

Another option would be to make mortgage securitization purely private, perhaps with federal guarantees for some mortgages that met strict standards, he said.

Fed official renews call for higher rates

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