A voting member of the Federal Reserve’s policy-setting body, the Federal Open Market Committee, said its meetings are “intense” these days, as the Fed wrestles with how to wind down its financial rescue programs without triggering more economic instability.
“There's no question about it,” Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, told Fox Business in an interview Wednesday. “These are very difficult times.”
FOMC deliberations are closely guarded. The committee normally meets eight times a year to set monetary policy, including the short-term Federal Funds interest rate, which influences interest rates on many consumer and business loans. It releases minutes of each session three weeks later, but they exclude any references to emotion, mood or tone.
“You have different opinions. And I think it's important we express them -- and we do,” Hoenig said. “ We don't always agree…But it's not personal, in that sense. It's very professional. And we're very systematic. You go around a table. And you don't deliberately interrupt.
“We're all very committed to this,” he added. “We all have the same goal--what's best for the country. And that's a big advantage, when you know that your goal is what's best for the country.”
The Fed has been under greater scrutiny because of the financial crisis and its policy responses to it. It launched unprecedented emergency financial rescue programs, including new government lines of credit to Wall Street and special Fed backstop facilities to encourage liquidity in lending markets, which locked up during the crisis.
As the crisis has faded, the Fed has begun to wind down and close the programs – known by such names as TAF, TALF and TSLF – one by one. In some cases, with financial markets returning to health, banks simply don’t need them any longer.
But just as the Fed entered uncharted territory in creating them, it is also in uncharted territory in exiting them.
“It is tricky,” Hoenig said. “That's why I want us to do it very sequentially. I don't want us to be giving guarantees to the market…We don't want to scare them, at the same time. That means we have to do it in little steps to begin with, to see how it works, and then back ourselves out of this.
“There is no formula,” Hoenig said. “There is no mathematical equation. It is part art, as well as economic science.”
Hoenig’s profile has risen this year for his votes at the last two FOMC meetings. Of the ten current members, he was the only one to dissent on its policy to maintain “exceptionally low levels of the federal funds rate for an extended period,” as the committee has put it in its statements. After the financial crisis began, the FOMC began cutting the rate aggressively, down to near zero in December 2008, where it has kept it.
“If you have a point of view, and if you think it's important and if you think it ought to be communicated, then you should vote accordingly,” Hoenig said.
An economist and the longest serving of the current 12 Federal Reserve bank presidents, Hoenig is a long-time inflation “hawk.” He rejoined the FOMC in January as part of a regular annual rotation of Fed bank presidents onto the committee.
He currently believes that even with unemployment still high, inflation still low and the economic recovery still young, the FOMC should be increasing interest rates to head off any emerging inflation pressures, as well as any potential “asset bubbles,” like the bubble in the housing market that contributed to the financial crisis. Many economists blame the housing bubble on low interest rates the FOMC adopted and maintained after the recession of 2000-01 and the attacks of 9/11.
“We have a vote,” Hoenig said. “It is a vote to use. If all my assignment was, was to agree, then I don't need a vote. I'm just an advisor…We're a committee. Committees work best when you have different endpoints to come out to a conclusion. And you don't always want--you can't always have-- ‘unanimous.’ I don't think that you get better outcomes by having a ‘unanimous’ in every instance…That's a good thing, not a bad thing.”