FDIC Vice Chairman Thomas Hoenig today warned that the persistent low-interest rate environment has not boosted economic growth as much as expected and that it is contributing excessive leverage in the financial system. To break out of what he referred to as the “accommodative policy loop,” Hoenig advocated at a Washington, D.C., monetary policy conference for raising interest rates “in a clear, deliberate manner toward an announced long-run target rate or range,” and for remaining on course even in the face of short-term stress.
Meanwhile, to protect banks from “shocks” associated with the return to normal monetary policy, Hoenig repeated his frequent call for higher minimum bank capital levels, which he said could be accomplished through retained earnings. On both monetary policy and regulatory capital, he emphasized long-term strategies. “Policy cannot stay on its current path of low-for-long rates and return-to-lower capital without undermining the resilience of the financial system and the economy, and without inviting harsher future adjustments, as occurred in past episodes when policy was highly accommodative,” he said.