Hoenig’s “HARD CHOICES”… Bernanke’s Replacement?

At a Town Hall meeting in Lincoln, Nebraska, Kansas City Fed president Thomas Hoenig is out with a speech called HARD CHOICES.  Hoenig is calling again for the end of the zero-rate policy by the FOMC.  It is Hoenig’s stance that deflation is not the main threat and that the US economy will still see grow averaging about 3% this year.  He still wants the Fed Funds rate to go from virtually zero up to 1%.  Some may treat this as overly hawkish considering the recent slowing of growth, but this is actually very positive today if you consider that he is still expecting things to hold up.

Hoenig is no longer a supporter of more quantitative easing actions.  His belief is that the current policy stance risks creating future problems.  He even went as far as saying free money isn’t really free and it’s time to move toward 1% in funds.  If Hoenig is right, Fed Funds will go up to 2% after some time.

Hoening said that there is modest and mixed growth and is seeing an as-expected economic recovery, even though unemployment is too high and conditions are not great.  More importantly, the recovery is better than the last two moves from recessions.

Hoenig noted that the accomodative policy stance still appropriate, but the US just needs a less accomodative stance now under the new circumstances.

While the markets are fond of free money, that has to end. On deficit spending, Hoenig said that the current budget deficits are not sustainable.  Also noted, “The federal government needs to rebalance its balance sheet as well. Federal and state budget pressures are enormous, and uncertain tax programs surely are a risk to the recovery.”

There is also the stance that banks have plenty of reserves to lend, and confidence is the main impediment right now. He also admitted that “too-big-to-fail” will not go away easily.

The obvious note on jobs was that jobs have to come from the private sector.  Hoenig noted that while the positive job growth has been far less than ideal, it is still growth.

Ben Bernanke was called Helicopter Ben for a reason.  Hoenig might sound like he’s called Hawkish Hoenig, but it seems more like a “Undoubting Thomas” if you read at the implications.  At least we know that there is one Federal Reserve member willing to stand out from the crowd and raise rates at a natural rate rather than some day way down the road.  Maybe Hoenig should be the next Chairman of the Federal Reserve.

FULL SPEECH

JON C. OGG