Thomas Hoenig has been in his position a long time — in fact he has more time in his position than any other head of a federal reserve bank. In that job since 1991, he's seen a lot of different efforts to affect the economy come and go. He told ag leaders and farmers at Purdue recently that the current financial policy that the Federal Reserve is following simply can't hold forever.
Hoenig, originally from Iowa, is chairman of the Federal Reserve Bank of Kansas City. He came to Purdue as party of the James Snyder lecture series. The 37th annual event honors a former Purdue University ag economist recognized for brilliant skills by his cohorts, whose life ended far too son. His wife and daughter were in attendance at the event. The Department of Ag Economics also uses the occasion to present awards to deserving students, and to showcase what is occurring within the department.
Hoening was the only committee member of the Federal Reserve who issued a dissenting opinion after their most recent decision to keep policies in place that effectively keeps the interest rate at zero. He believes continuing on this path could have consequences down the road.
"Cheap money and very low interest rates are appropriate to help us get out of a recession," he says. "So when that was done after this last recession began, it was a good thing. The problem is you don't want to see it continue forever. At some point, you need to edge back toward real world situations."
What Koenig sees now is an artificial environment. His strategy would be to ease up interest rates gradually, very slowly, so that the economy has time to adjust. It might take a period of several months to accomplish the objective — moving the economy and the people who work and live within it back toward more realistic relationships, where the interest rate isn't zero.
At some point that adjustment will have to be made, he notes. But by artificially holding the rate lower than it should otherwise be, it doesn't allow the rest of the economy to move back toward a normal situation, he adds. If continued, the result could actually be pushing us back into another recession.
There is precedence for this, he notes. Everyone talks in terms of the Great Depression, but Koenig says there was actually a recovery in the mid to late 30s. Then because of mistakes in monetary policy, a recession returned in '37 and '38. That's what he hopes we can avoid this time.