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Posted by on Aug 13, 2010 in Economy, TG Roundup

Low Interest Rate Policy is a Dangerous Gamble: Says One of Them

Two days after I said that Feds are continuing their war on savers, one of the Fed governors came out and more or less agreed with me.  Federal Reserve Bank of Kansas City President Thomas M. Hoenig, the Fed’s longest-serving policy maker and one of 10 people who decides the interest rate borrowers pay on mortgages, loans and other credit products, said that the Fed’s policy of effectively guaranteeing zero percent interest rates for the foreseeable future is “risking a repeat of past errors and the consequences they bring.” Huffington Post reports:

Hoenig, who’s dissented from all five Federal Open Market Committee decisions this year to keep the rate at which banks lend to each other for overnight funds between 0 and 0.25 percent, said the economy is in a “modest recovery, with mixed results” and intimated that policy makers shouldn’t be beholden to “volatile monthly data” nor should “market participants…direct policy.”

“Of course the market wants zero rates to continue indefinitely,” Hoenig said in prepared remarks during a speech in Lincoln, Neb. “They are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.”

Meanwhile, the Fed’s zero interest-rate policy “is as likely to be a negative as a positive in that it brings its own unintended consequences and uncertainty.” Getting rid of Wall Street’s guaranteed source of profit — borrowing from the central bank and investing that in Treasuries — “tells the market that it must again accept risks and lend if it wishes to earn a return,” Hoenig said.