Hoenig proposes that the Fed sells off their massive balance sheet and raise rates to 1% immediately

The Kansas City Fed's Chief, Thomas Hoenig, spoke a word of caution to the Fed in London.  His most damning comments were concerning inflation and asset bubbles.  Never before has the Federal Reserve practiced such accommodative monetary policy.

Such money printing largess has always been followed by inflation and/or asset bubbles.  Like the housing bubble which ripped the whole developing world from 2003-2008.  Via WSJ:

"If current policy remains in place, we almost certainly will stimulate the growth of asset values and inflation," Federal Reserve Bank of Kansas City President Thomas Hoenig said. "There are signs that the world is building new economic imbalances and inflationary impulses," he said, explaining "the longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth."

Delaying action "introduces instability" into the system by requiring bigger policy steps to bring inflation back under control, he noted.
Hoenig made his comments in a speech at the London School of Economics. The official isn't currently a voting member on the interest-rate setting Federal Open Market Committee. The central banker, who is due to retire in October, has been a persistent critic of the policies the Fed has been pursuing.

Hoenig dissented at all of last year's FOMC meetings, arguing the Fed need not run a crisis-style monetary policy at a time when the economy was on the mend. Last year, he also advocated for raising the central bank's overnight fed funds rate from its current rate of zero percent, to 1%, at which point he said the central bank could take stock of the economy's position.

While Hoenig's concerns are shared by some other regional Fed bank presidents, policymakers at the center of the FOMC decision making--Fed Chairman Ben Bernanke, Vice Chair Janet Yellen and New York Fed President William Dudley--have disagreed. They have largely believed as long as the unemployment rate remains high, inflation will remain unusually low, and they have supported a strong policy response to help the economy grow more robustly. Those officials, and others, have been strong advocates of the Fed's $600 billion bond buying program that is slated to end in June.

Much of what Hoenig said in London wasn't new. But he was somewhat specific in pointing to areas where he believes monetary policy is proving a less-than-benign influence.

"Agricultural land prices, for example, are increasing at double-digit rates," Hoenig said. "High-yield securities in financial markets are demanding price premiums beyond what some would judge reasonable relative to risk." As for rising food and energy prices, "some of the increase may reflect global supply and demand conditions," Hoenig said. But at the same time, "at least some of the increase is driven by highly accommodative monetary policies in the United States and other economies."

The long-serving central banker also said history has a warning for the current Fed policy. "Extended periods of accommodative policies are almost inevitably followed by some combination of ballooning asset prices and increasing inflation," Hoenig said. "The monetary policy being implemented currently within the United States and much of the world is more accommodative now than at the height of the crisis," something out of line with a economy that's clearly recovering.

He warned against the idea that the U.S.'s policy of quantitative easing has been a success in rebalancing real exchange rates through higher inflation rates in those countries that have kept their currencies pegged to the dollar.

"You have to be careful not to cut off your nose to spite your face," Hoenig said, saying that such advantages would be "short-lived."

Hoenig again called for tighter policy. He said the Fed "should move the U.S. federal funds rate off of zero and toward 1 percent within a fairly short period of time" and evaluate the impact of that move.

"After evaluating the effects of those actions, it should be prepared to move the funds rate further toward a level that could be reasonably judged as closer to normal and sustainable," Hoenig said.

He also argued that the Fed can reverse its course and dispose of the massive pile of bonds that it has bought since the crisis without causing market disruption.

The policymaker also said "the FOMC should gradually allow its $3 trillion balance sheet to shrink toward its pre-crisis level of $1 trillion."

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