Kansas City Federal Reserve Bank President Tom Hoenig's biggest concern is a long period of high inflation in the future.
That was the crux of Hoenig's presentation Monday at a Wichita Rotary Club luncheon at Botanica.
Hoenig has been the lone voice of dissent in the Federal Open Market Committee's decision to keep interest rates low and, more recently, to spend $600 billion to buy longer-term government bonds in hopes of further stimulating lending.
He said there's already plenty of liquidity in the market and the economy is recovering, albeit slowly.
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Continuing to keep rates low and introducing more stimulus will only serve to build in expectations for higher inflation in the long term, he said.
And then inflation will be hard to curb.
"That's why it's important to not wait too long to withdraw the stimulus," he said in an interview with The Eagle following his speech.
He said he thinks ratcheting up interest rates over an extended period would also curb higher inflation down the road. But it would have to be done gradually, and with plenty of signals to the market that the Fed was going to hike rates, he said.
Hoenig chuckled during the interview when Diane Raley, public information officer at the Kansas City Fed, reminded him of someone remarking to him at an event in Wyoming that "he is the guy who favors high interest rates."
"I said, 'No. I'm for non-zero interest rates,' " Hoenig said.
His concerns about the future don't stop at monetary policy.
He said he's also concerned about a bubble developing in agricultural land loans. That's a function of excess liquidity going to areas where investors can get a greater return.
Taking excess liquidity out of the system would help ease any bubbles in that sector, Hoenig said.
He also said that the problem of too-big-to-fail banks "has not been solved." Financial reform has not broken up the banks that are so big that their failure could negatively impact the country's financial system.
"That means these institutions will re-emerge larger and stronger," Hoenig said. "They have a huge capital cost advantage, a huge competitive advantage over regional banks across the country."
He said the total assets of the five largest banks in the U.S. are equivalent to 60 percent of the nation's Gross Domestic Product.
As for banks in the Kansas City Fed's 10th District, Hoenig said he thinks bank failures will peak this year.
"I'm hoping that begins to trend down," he said. "Some of these banks can still raise capital, and those that do will survive."
Hoenig said he thinks the total bank failures in the 10th District in this crisis will be far fewer than the banking and savings and loan crisis from a couple of decades ago.
"I do think, knock on wood, it won't be anywhere near the '80s," he said.