The U.S. central bank's withdrawal of extraordinary monetary stimulus for the economy should be done as deliberately as possible, a senior Federal Reserve official said on Friday.
Federal Reserve Bank of Kansas City President Thomas Hoenig told a Levy Economics Institute conference he would not want to disrupt markets by selling too quickly the assets the central bank acquired during the financial crisis.
But, he said, he would like to keep the option open for selling the mortgage-backed securities bought as part of additional steps to get the economy going, rather than just letting them roll off the Fed's balance sheet.
My view is we should exit as deliberately as possible, Hoenig said. I don't want to disrupt the market by quick sales but I want to leave the option open for taking them off the balance sheet through more than just amortization.
The Fed - the U.S. central bank - cut its benchmark interest rate to near zero during the crisis and bought longer-term assets including $1.25 trillion of mortgage-backed securities.
That more than doubled the central bank's balance sheet to over $2 trillion. Hoenig said he would eventually want to see it back below $1 trillion.
Hoenig, a voter on the Fed's policy-setting Federal Open Market Committee this year, dissented at the past two policy meetings because he did not feel comfortable with the Fed's pledge to keep rates ultra-low for an extended period.
Asked about whether the U.S. central bank should raise reserve requirements for banks, Hoenig said even discussing using this tool would cause unwanted uncertainty in markets at this point. But he said the topic should be revisited later.
He reiterated his view that big banks should be broken up, and said he was a very strong supporter of the Volcker rule to ban commercial banks from engaging in trades not done on behalf of their customers.
The country would be well served by more smaller banks, Hoenig said, adding he supported clear, firm leverage limits for banks.
Hoenig said he has concerns that regulatory reform being discussed in Congress doesn't adequately address the problem of banks that are too big to fail.
Hoenig said any law should require large insolvent firms to be placed into receivership, like smaller banks.
The Kansas City Fed chief also criticized the Senate proposal to strip the Fed of supervision of thousands of smaller banks. He said that would lead to the Fed being marginalized outside of Wall Street and Washington.
I see Wall Street come out of this crisis stronger than ever... Something has gotten turned upside down, Hoenig said.