June 19, 2009 / 1:23 PM / 9 years ago

Fed's Hoenig says inflation a longer-term issue: report

WASHINGTON (Reuters) - Federal Reserve Bank of Kansas City President Thomas Hoenig said on Friday that the U.S. central bank was thinking seriously about its exit strategy, but inflation was not yet an imminent danger.

“I think the inflation outlook is one that is for the longer term. But I think ... the role of the central bank is to think longer term. And therefore we have to be mindful of that, and that is what this focus on an exit strategy is all about,” he told CNBC Television in an interview.

“I am confident (the economy) will turn around. The turning point? I don’t know at all. But I do know that with this amount of stimulus, both monetary and fiscal policy, it will turn around,” said Hoenig, who will be a voter on the Fed’s monetary policy-setting committee next year.

The Fed has cut interest rates to almost zero and doubled the size of its balance sheet to around $2 trillion by purchasing assets to shore up credit markets and reflate the economy as it fought the worst U.S. recession in decades.

“As soon as you introduce methods to deal with the crisis, as we did, that are out of the norm, you should very quickly begin to think about what your exit strategy is. And that is the process we are in right now and we’re thinking it through,” said Hoenig. He is among the more hawkish, or anti-inflation members of the Fed’s policy-setting committee.

“We have put an enormous amount of liquidity into the system ... If it is allowed to remain indefinitely, and we keep a very low (interest) rate for an extended period of time, then we do risk an inflationary outbreak,” Hoenig said.

This threat might not necessarily emerge next year, he said, but even if it was only going to be a problem in three or four years’ time, policy-makers could not afford to ignore it.

“Some people think that is a long ways off. But in the context of history, that is very quick and I think it is something we need to be concerned about,” he said.

Reporting by Alister Bull; Editing by James Dalgleish

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