Hoenig: QE2 Won't Work

Brian Hicks

Updated October 13, 2010


As the biggest hawk on the meter, this one shouldn’t come as much of a surprise.

True to from, Kansas Fed President Thomas Hoenig is no big fan of QE2….

From Reuters by Ann Saphir entitled: More Fed easing likely won’t help economy:Hoenig

“Kansas City Federal Reserve President Thomas Hoenig, who all year has steadfastly opposed the Fed’s super-easy monetary policy, fleshed out his stance against further easing on Tuesday, saying it would do little to aid recovery and could spark inflation.

The Fed has kept interest rates near zero since December 2008, and bought $1.7 trillion in mortgage-back securities and Treasuries to support economic recovery.

Markets are pricing in expectations the Fed will move to drive down interest rates further to help boost the economy, restarting Treasury purchases as soon as next month in a new round of quantitative easing, or QE2 as it has come to be known.

“We have to recognize that QE2, while a possibility, is not necessarily what we want to do given the benefits versus the risks,” Hoenig told the National Association of Business Economics. “At this point, with a modest recovery under way and inflation low and stable, I believe the economy would be better served by beginning to normalize monetary policy.”

Expectations of further monetary easing in the United States have already pushed up currencies in countries from Latin America to Asia, prompting loud complaints.

Hoenig, as one of the Fed’s most consistent hawks more concerned with the threat of inflation than unemployment, said the Fed needs to be mindful of such spillover effects.

“We are not an island,” he said. “We affect other countries, they know that and they react to us, and therefore we are affected by our actions as it comes back to us.”

Many analysts believe that the Fed has signaled so strongly that further easing is imminent that it cannot back down without disrupting bond markets.

Hoenig took exception to that view, saying the Fed’s responsibility is to the broader public, not just the financial markets.

“We have to do what we think is right – they have to adjust their policies accordingly, not us,” he said.

In any event, he argued, further purchases of Treasuries would not drive down interest rates by much.”

Is it me… or is groovy Ben about to drive the magic bus right off the cliff?

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