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.