Fed's Hoenig warns on bank debts, exit strategy: report

WASHINGTON Tue Mar 24, 2009 5:52pm EDT

WASHINGTON (Reuters) - Inflation is a bigger risk in the United States than deflation and the country must do a better job in cleaning up its battered banking industry, a top Federal Reserve official said on Tuesday.

"The odds of deflation are fairly remote. I've always thought that," Kansas City Federal Reserve Bank President Thomas Hoenig told Dow Jones Newswires in an interview.

"I think we risk a very serious inflationary problem with new bubbles that could be created," he said, referring to the aggressive doubling of the Fed's balance sheet to confront a credit crisis sparked by the collapse of the U.S. housing sector.

Hoenig, who will be a voter on the Fed's policy-setting committee in 2010, is a long-standing anti-inflation hawk who conspicuously broke ranks with his Fed colleagues earlier this month to voice worry at the ad hoc approach to the crisis.

The Fed is taking part in a Treasury plan to cleanse toxic assets clogging bank balance sheets, but Hoenig, a former bank regulator, voiced concern this just postpones the problem of winding down banks whose bad debts are too serious for them to survive.

"You're assuming that this is generally distributed across all banks and you haven't, in a sense, judged the individual condition of the financial institutions involved," he said. "I'm of the view that we still need to be thinking about an effective resolution process for institutions."

(Reporting by Alister Bull; Editing by Kenneth Barry)