Hoenig says Fed rate cuts face headwinds
RIO DE JANEIRO (Reuters) - Federal Reserve interest rate cuts face "headwinds" in gaining traction but easier monetary policy also runs the risk of fueling inflation. Kansas City Fed President Thomas Hoenig said on Friday.
"In the current situation, monetary stimulus is facing significant headwinds ... In these circumstances, a central bank may have to ease policy more in order to achieve its desired effect," Hoenig told a meeting of the Institute of International Finance.
Even so, the Fed -- the U.S. central bank -- has "significantly" lowered rates, along the lines of its policy response to the 2001 U.S. economic recession, and often finds rate cuts, once made, hard to reverse, Hoenig said.
"There may be a buildup of inflation pressures if monetary policy remains too easy for too long," he said.
The Federal Open Market Committee has slashed the federal funds target rate to the current 3 percent from 5.25 percent since mid-September in the face of a strained economy.
Those cuts are "quantitatively similar to the aggressive easing of policy in the first half of 2001," Hoenig said.
The FOMC next meets March 18 to consider interest rates.
Hoenig's comments suggested he does not share the financial market's zeal for another 50 or 75 basis-point cut to the funds rate. Hoenig is not a voting member of the FOMC in 2008.
There are 100 basis points in a percentage point.
Known as one of the Fed's more hawkish members, Hoeing said reversing course on rates once conditions change is often easier said than done:
"Historically it has been more difficult to remove policy accommodation in a timely fashion, which may have consequences for a central bank's longer-term inflation objective."
Fiscal policy, although slower to take effect, should play a bigger role in responding to economic spillovers from financial crises, Hoenig said.
The Fed and other central banks have been active in attempting to restore financial stability by providing liquidity to banks.
"We need to consider whether some of the changes ... such as the Term Auction Facility, should be made permanent," Hoenig said.
Earlier on Friday the Fed said it would increase amounts in upcoming TAF auctions, special sales announced in December to help counter the credit crunch that resulted from last year's mortgage debacle. Continued...
