Hoenig said it: The Federal Reserve is Monetizing debt

The Federal Reserve with its QE and QE2 have admitted what we have said all along.  The Fed is printing money out of thin air, and in the process, monetizing the debt.  This is not out of line for Hoenig, after all, he did dissent on every single Federal Reserve meeting last year. 

But as we descend into the la-la land of print money for growth and jobs, we must remember that it takes time for inflation to raise its head.  Also, since money is fungible, it may seek greener pastures overseas and cause inflation there or inflate asset bubbles.  Via BW:

Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank is “monetizing debt” with its purchases of U.S. Treasuries, a program that he says may spur inflation.

“Yes, we are monetizing debt,” Hoenig said today in a speech in New York. “You buy bonds and you monetize debt. Right now, a lot of that is going into excess reserves so it is not having an immediate effect on inflation. It will initiate inflationary impulses. It takes time.”

Hoenig, the lone dissenter from every Fed meeting last year, warned that the central bank’s near-zero interest rates and record monetary stimulus could lead to asset price bubbles and increase inflation in a few years.

He voted against the Fed’s plan to purchase $600 billion in U.S. Treasury securities through June during the final two meetings of 2010. Hoenig told the Council on Foreign Relations the Fed needs to explain how it plans to reduce its record $2.54 trillion balance sheet. While he would avoid “shock therapy” of selling assets all at once, “we want to begin to show how we will withdraw that.”.
Also, we called for rates to be moved from zero to 2% since January (see here, here and here).  It distorts real incentives for investment and savings. 

The central bank should raise the target federal funds rate to 1 percent from near zero rather than ease during the current economic recovery, Hoenig said, reiterating comments from last year.

“You really need to get off of zero, in my opinion,” Hoenig said. “I would think of moving back to 1 percent, and then I would pause. Let the market settle out” and then move to a higher rate, possibly 2 percent.
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