Retiring Fed member Hoenig, famous for his dissent vote all of last year on expanding Fed policy and actually calling for raising rates, is laying out again his call for the dangers of current policy in a speech. What is also of interest is his accusation that the Fed is largely to blame for the credit bubble (clear as day to me and many of my readers). “In the spring of ’03 there was worldwide concern that the US economy was falling into a ‘Japanese-like’ malaise; the recovery was stalling, deflation was likely to occur and unemployment was too high.” This was despite economic growth of 3.2% annualized and global growth of 3.6%. The fed funds rate was 1 1/4% at the time. “Although most knew that such a low rate would support an expanding economy, in June ’03 it was lowered further to 1% and was left at that rate for nearly a year, as insurance. Following this action, the US and the world began an extended credit expansion and housing boom…The long term consequences of that policy are now well known.” While others are to blame too, “monetary policy cannot escape its role as a primary contributing factor.” “The fact is that extended periods of accommodative policies are almost inevitably followed by some combination of ballooning asset prices and increasing inflation.”
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