WASHINGTON (Reuters) - The Federal Reserve’s easy money policies risk causing inflation unless the Fed scales them back soon, Kansas City Fed Bank President Thomas Hoenig said on Tuesday.
“If you pump dollars into the system at a rapid pace ... eventually you will see prices rise,” Hoenig said in a speech to a community group. “You should match the removal of highly accommodative, crisis accommodation, as the economy improves,” he said.
Hoenig has persistently opposed the Fed’s ultra-loose monetary stance, dissenting 8 times against it when he was a voter on the Fed’s policy-setting panel in 2011.
The central bank last week affirmed it is not hurrying to reverse interest rates near zero and bond buying programs that have pumped $2.6 trillion into the financial system to date. In Fed Chairman Ben Bernanke’s first ever regularly scheduled news conference after a policy meeting, he said last week the economy is only slowly digging itself out of a deep hole.
However, while the Fed has said it is watching rising prices carefully, Hoenig said he is concerned that if the central bank drags its feet, it risks later needing to resort to an abrupt tightening that could be disruptive.
“You need to withdraw that excess liquidity slowly from the start so that you don’t shock the economy later,” he said.
Hoenig also said legislation introduced by Representative Barney Frank that would curtail the role of the 12 regional Federal Reserve banks in setting monetary policy would be a mistake because it would diminish the influence of voices outside Washington and New York in monetary policy.
“We have institutions across the country ... who have local boards of directors, including bankers and businesses, consumers, labor, who have grass roots input into the process,” he said.
Reporting by Mark Felsenthal, Editing by Chizu Nomiyama