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Dead Constitution See other Dead Constitution Articles Title: Fed’s Objectives Threatened by U.S. Debt Feb. 16 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the U.S. must take “difficult” steps to reduce spending and increase revenue so the central bank isn’t pressured to fund the “unsustainable” federal debt. “It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long- term growth, and therefore is a threat to its independence as well,” Hoenig said today in a speech in Washington. The Obama administration estimates budget deficits will total $4.3 trillion during the next five years and hit a record $1.6 trillion in the year ending Sept. 30. The U.S. must be “willing to disappoint a host of special interests” and tackle the debt, or it risks “its own next crisis,” Hoenig said. “A government faced with rising debt levels must provide a credible long-term plan to re-establish fiscal balance,” Hoenig said in remarks at a policy forum hosted by the Peterson-Pew Commission on Budget Reform. Hoenig said the plan should include “controlling budget earmarks, trimming subsidies to numerous economic sectors and resolving our banking problems and the perception that Wall Street is favored over Main Street, all of which would otherwise foster mistrust and cynicism among the public.” Responding to audience questions, Hoenig said the Fed’s “primary goal” now is executing its “exit strategy” from a record credit expansion in a way that “doesn’t cause harm.” ‘Remove’ Assets Hoenig, referring to assets including the $1.25 trillion of mortgage-backed securities the Fed is purchasing through March, said the central bank needs to shrink its balance sheet “as quickly but as carefully and as systematically as we can.” Hoenig, 63, is the longest-serving Fed policy maker, having been the Kansas City bank’s president since 1991. At last month’s Federal Open Market Committee meeting, he cast the lone dissenting vote, objecting to language in the statement indicating interest rates will remain low for an “extended period.” The budget commission, a venture of three organizations, is convening experts over a two-year period to make recommendations on U.S. fiscal policy and the federal budget process, according to its Web site. President Barack Obama has proposed a three-year freeze on discretionary spending outside of defense and homeland security, which the administration says would save $249 billion over 10 years that otherwise would be spent. ‘Sustainable Level’ The U.S., to curtail the debt, should choose the option that’s the “most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level,” Hoenig said. “I recognize that this last option involves hard choices and short-term pain,” Hoenig said. “However, in my view it is the responsible path to sustainable economic growth with price stability.” Hoenig criticized a comment published last week from Olivier Blanchard, the International Monetary Fund’s chief economist, that central banks should increase their targets for inflation. “While this may sound like a reasonable theory from a credible economist, my concern is that it rationalizes solutions to short-term problems that too often take an economy down the wrong path,” Hoenig said.
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