Fed's Hoenig: Dollar to remain reserve currency

09/28/2011 10:58 am ET | Updated Nov 28, 2011

By Carey Gillam

KANSAS CITY, Missouri (Reuters) - A departing Federal Reserve official lit into the U.S. central bank's ultra-easy policies on Wednesday, saying they may be doing more harm than good and could harm economic growth over the long term.

"When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have in fact bought problems," Kansas City Federal Reserve Bank President Thomas Hoenig said in his final speech in office. He retires on October 1.

The Fed has cut rates to near zero and bought more than $2 trillion in bonds to boost the economy. Through much of that campaign of monetary easing, Hoenig has advocated a tight policy stance.

Although Hoenig has not been the only dissenting voice among the Fed's ranks, the consensus at the central bank has favored, and is likely to continue to favor, an active effort to buttress weak economic growth.

Even so, the objections from Hoenig -- the longest-serving policymaker at the Fed -- underscore the controversy surrounding the unconventional policy steps the bank has taken.

Under Chairman Ben Bernanke, the Fed has moved aggressively over the past four years to soften the blows from the bursting of the housing bubble and the financial crisis, as well as the deep recession that ensued.

The Fed's actions have come under fire both at home and abroad from critics who charge the central bank is risking a surge in inflation and undermining the value of the dollar.

FISCAL POLICY CRITICIZED

Hoenig leveled blame at lawmakers as well, saying the Fed's stimulative policies were a band-aid for a failure to credibly commit to lowering the United States' long-term debt. Lack of political courage to curb spending and government subsidies and rein in debt would likely lower the U.S. economy's long-term growth potential from about 3 percent a year to as low as 2.5 percent, he said.

"We will not fall off the cliff," Hoenig said. "But what it does is it lowers the potential growth rate of your economy."

The U.S. economy grew at less than a 1 percent annualized rate in the first half of the year and expectations of a robust second half have been scaled back sharply in recent weeks.

Political bickering over how best to reduce the nation's debt and concerns Europe was not getting a handle on its debt crisis have hit consumer and business confidence hard.

In its most recent move, the U.S. central bank last week launched a portfolio rebalancing plan to buy $400 billion in longer-term bonds while selling a like amount of short-term debt in an effort to push down longer-term interest rates.

Hoenig will be replaced at the regional Fed bank by Esther George, whose views on monetary policy are not known.

Despite his warnings about Fed policy, Hoenig retained confidence in the underlying resilience of the economy and said he was not worried the dollar would be knocked from its perch as the preferred currency of global investors.

"The dollar will be the reserve currency of the world for some time to come," said Hoenig.

(Writing by Mark Felsenthal; Editing by James Dalgleish)

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