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Is it finally time to raise interest rates?
interest rates paper
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Kai Ryssdal: We just had, about as directly as you can get, the voice of the American consumer. Donald Holzschuh and his worries about the economy and the high price of everything, as he said.
Now to someone who until last year directly affected those prices by helping to set interest rates. Thomas Hoenig is the president of the Federal Reserve Banks of Kansas City. In 2010, he was a member of the Federal Open Market Committee, the office of the Federal Reserve that controls what's called monetary policy.
Welcome to the program.
Thomas Hoenig: Thank you. Good to be here with you.
Ryssdal: When you were on the Federal Open Market Committee last year, you dissented from every single one of the statements that the Federal Board of Governors made, in which they said we're going to keep rates as low as we can for as long as we can. Why, what's your contrarian position?
Hoenig: Well, the interview you just had is why. This individual who's working hard to make ends meet, seeing all his prices go up, his input costs, and that's the reflection of having very easy monetary policy for an extended period of time. He can't make ends meet. And what's fair about that?
Ryssdal: Had you had your way last year and been able to convince the board at the FOMC to raise interest rates, what would be happening in the economy right now, and how would that have played out?
Hoenig: No one knows, but what I'm saying is that I was not in favor of high interest rates. There's a difference. I was in favor of taking it off zero, because zero is misallocation credit. Who wants to save at zero? What's you do is you encourage further leverage in a country that is already highly leveraged. And I asked the question, can you name me a product, can you name me a service that trades well, that allocates resources well at a price of zero. And the answer has uniformly been, no. So why would you expect credit to be different?
All I was saying was to have a modest increase so we could let the markets decide where resources ought to be allocated. And, in doing that, take away the uncertainty about the future in the sense that everyone's now worried about what the inflation outbreak will mean for them, just like this truck driver.
Ryssdal: Has not the Fed, though, taken away the uncertainty for the future? They said the other day, we're going to keep interest rates low until 2013 and you guys are secure in that.
Hoenig: My own view is that they've actually increased the uncertainty because, what does that mean? You mean to tell me that we have to stay at zero for another two years? Is the economy that bad? People are asking that question. And then they're saying with that, what does it mean for inflation? That's why you see the price of gold moving up very rapidly. And commodities that have paused now, I fear, will rise depending on how the economy itself does. I hope I'm wrong, but what I fear is that we've increased uncertainty, not removed it.
Ryssdal: What should the role of consumers be in this economy?
Hoenig: The consumer is the citizen, and they have to buy goods and services, and they want to be able to do it in an environment where prices are stable. But I don't think the consumer bail out all issues, because here's one of the things that's happened in this country. The consumer used to amount to about 66 percent of our gross domestic product. And as we moved through the boom, it moved all the way up to 70 percent. So we were relying on the consumer for much more of our growth in the economy.
We were not saving as much, and to do that, we were borrowing from the rest of the world, so we were increasing our debt to the rest of the world. Then what are you doing? You're consuming more than you're producing. What we need to be thinking about in this country is how do we re-emphasize production enough to meet, reasonably, our needs, enough to export to the world so we are now balanced, that were are producing and consuming in align with one another.
It's not easy to get there. It took us two decades to get where we are today. But to have that in mind so that we are a balanced economy and an industrial and consuming leader of the world as we once were.
Ryssdal: You turn 65 next month and Fed rules say you have to retire at 65. What are you going to do with yourself when you don't get to dabble in monetary policy anymore?
Hoenig: Well I have to retire from the Federal Reserve bank of Kansas City, but I don't necessarily have to retire.
Ryssdal: Fair enough. Thomas Hoenig is the president of the Federal Reserve Banks of Kansas City. Mr. Hoenig, thanks very much for your time.
Hoenig: You're very welcome. Good to be with you.
This shouldn't even be an argument. The very first formal rule of economics, written in 300 AD, is that price controls cause shortages, hoarding and black markets. We've controlled the price of capital, and we have shortages, hoarding and black markets in capital. Perfectly unsurprising. Any so-called "economist" who claims that price control on interest is a good thing, is by definition not an economist. He's just a shill for some corporation or speculator.
KY - PLEASE - dig into this interest rate thing some more. I think the Fed guy is really on to something. There is NO utility in money now. There are trillions (?) on the sideline because no one can get anything for their money. Look at the demographics too. I am 64 - leading edge of baby boom. Saving everything I possibly can and praying to retire in about 2 years. I'm very frustrated because I'm getting no 'help' or 'value' from the money I've worked so hard to save. SO, I'd like to buy a small retirement place. I actually need to buy a new vehicle, BUT, I'm just a regular guy, and I may have $400,000 set back. BUT, if I buy any of these items, I simply diminish my nest egg, and you know what it takes on a yearly basis to live even a modest lifestyle. SO, I'm frustrated and scared to spend. HOWEVER, if I could get even 5% interest on my money, that would give me an additional $20,000 a year and I wouldn't be eroding my nest egg, and I'd feel a LOT better about going out and buying that car. AND, think of the number of baby boomers there are and the money they are sitting on, but are afraid to spend. SO, I tend to believe that low interest rates are actually hurting the economy and I'd love to hear more input on that on the program. Also, rather than the Fed saying no one is going to make anything on their money till 'maybe' (there's the uncertainty again), what if they said we're going to start moving rates back up up and plan to be at 5% Fed Funds rate by 2013?? I believe that would actually put a 'FLOOR' under the housing market, slow the price decline, set off a buying spree as folks try to get in before home prices actually start inflating, AND, it would allow banks - large and small - to actually have a little wiggle room and 'spread' as they lent money, so maybe they'd WANT to lend money again, AND, if they started making good profits again, maybe they could finally find the will to start writing off, eating, or whatever you call it, all those toxic assets they are still sitting on. PLEASE, think about this. Discuss it with people that know a lot more about it than I do, and let's see what the feedback is. I'll tell you one thing - the 0 interest mess we're in now is not working out too spiffy!! Thanks for your attention. I enjoy your show - I would like to hear you track oil prices each day. That's a big factor in disposable income, and it might even let us know whether we ought to gas up today or tomorrow. Thanks so much! Robert Stauffer
I was struck by Heonig's comment "Who wants to save at zero?" The previous day's story "Companies sit on huge reserves of cash" tells us who - "the non-financial companies in the S&P 500 have socked away more than $1 trillion." The same day Hoenig's interview was aired Treasury yields hit historic lows. Obviously, there are a lot of people still saving.
Finally some common sense!
Hoenig's proposals won't happen, of course, because uncertainty is the sole goal of the Fed. Speculators need maximal uncertainty, and speculators rule the universe.
The people who need stability (savers and small businesses) are Insignificant Mosquitos who cannot enter into an economist's highly refined calculations.
It’s hard to ignore the fact that a high interest-rate policy would disproportionately advantage the investor classes, who aren’t interested in investing in America anyway. Your guest here is a banker: I wonder whose interests he’s looking out for? Although increasing interest rates would help keep the dollar strong and deter inflation, it will also (by the way) fatten banking profits and increase costs to homeowners and holders of credit card debt. (My credit card company already tried to increase my interest rates—out of the blue, back in ‘09—with the only explanation being that they needed to “maintain profitability.â€) Surely paying down high levels of debt is more of a concern to Americans right now than inflation, even though your truck driver guest in the previous report expressed the opposite concern. Will rising interest rates do anything to reverse increasing fuel costs? That has to be chief among truck drivers’ main concerns, and the dollar is strengthening on its own as it competes against other currencies. I am by no means arguing in favor of another round of QE, but when it comes to Fed policies, it seems the time for criticizing it for a low interest rate policy is over. It ended in ’08. Increasing interest rates now will only exacerbate the problem of debt repayment, while enriching the financial industries in the bargain.
It is time to end ALL market intervention by the Federal Reserve. I am endlessly amazed at American's tolerance for the debasement of our currency and the total distruction of incentive for capital investment in the US. Because of Fed policy I've been shifting my assets overseas for years (like millions of other investors) and I can only say that I haven't been doing it fast enough. With the continuation of our current Fed policies, the sooner my investments are totally out of the US, the better.
You know someone is senile and should retire when they equate "low interest rates" with zero. All of Hoenig's arguments assume that there is NO incentive to invest. That is just plain untrue. The rest of his perspective is just conservative ideology dressed up as some kind of mathematical certainty.
