Fed's Hoenig Warns Against Further Monetary Action

Kansas City Federal Reserve President Thomas Hoenig broke ranks with some of his fellow regional Federal Reserve executives Tuesday, warning against further monetary action as way to spur economic activity.

Having the Fed purchase more Treasury bonds could harm the economy by creating more currency volatility, which would outweigh the benefits of possibly lowering already-low interest rates, Hoenig said in a speech at the National Association of Business Economists' annual meeting in Denver.

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"There simply is no strong evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down," Hoenig said. "Without clear terms and goals, quantitative easing becomes an open-ended commitment that leads to maintaining the funds rate too low and the Federal Reserve's balance sheet too large."

The possibility of further Treasury bond purchases on the part of the Federal Reserve has been a point of debate as government officials look for ways to spur economic activity and drive unemployment down.

Last week, Federal Reserve Bank of Chicago President Charles Evans proposed further monetary action, following up similar comments from Federal Reserve Bank of New York President William Dudley, who said last month that $500 billion of mortgage-debt or Treasury purchases would have the same effect on the economy as cutting the Federal Reserve benchmark interest rate by as much as 0.75%, according to Bloomberg News.

Meanwhile, Nobel Prize winning economist Joseph Stiglitz warned against such a policy, saying that monetary action would wreak havoc on the foreign exchange markets, according to a Reuters report last week.