Hoenig: Fed needs plan to withdraw liquidity
Thu Jan 8, 2009 6:07pm EST
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DENVER (Reuters) - The Federal Reserve must have a plan to withdraw the hundreds of billions of dollars it is pumping into the economy or risk creating inflation during the recovery, Kansas City Federal Reserve President Thomas Hoenig said on Thursday.
By the end of the second quarter, the Fed's balance sheet, now just above $2 trillion, could rise to $3 trillion, he said in remarks to an event organized by the Colorado State Bankers Association.
"This is important as a stimulus and as a risk to the economy that we need to be aware of," he said.
The Fed has cut interest rates aggressively and launched a range of lending facilities to boost the economy and stabilize financial markets thrown into chaos by the collapse of the housing balloon and surge mortgage defaults. The U.S. central bank lowered rates near zero from 5.25 percent in September 2007.
Hoenig said the Fed's liquidity facilities and its recent purchases of securities are a powerful stimulus for the economy but are fraught with risks.
"One of the great challenges for the central bank of the United States is to think ahead -- and we are -- to the long run, and do we have a plan to extract ourselves, to withdraw the liquidity at the right time and also take ourselves out of the intermediation process," he said.
Pulling back too soon could hurt the recovery, but "there is no question" waiting too long will have "a strong inflationary pressure through the longer term," he said.
(Reporting by Mark Felsenthal, Editing by Leslie Adler)