James Saft is a Reuters columnist. The opinions expressed are his own.
On one point departing Kansas City Fed President Thomas Hoenig and the high-yield bond market agree: current monetary policy is not helping.
Bonds issued to highly indebted and riskier companies have suffered since the Federal Reserve last Wednesday introduced “Operation Twist,” its attempt to suppress longer-term rates and goose investment and speculation.
This should come as little surprise to Hoenig, who retires from the KC Fed on Oct. 1 after a long career as a central banker and banking supervisor, and who has decried the way monetary policy has encouraged the running up of debts.
“When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have in fact bought problems,” Hoenig said on Wednesday in his farewell speech.
The cost of the debts, a drug that isn’t working any more, is becoming clear; from the utterly indifferent reaction in key markets to Fed policy initiatives and from the very poor performance of the economy since the bubble burst.
Hoenig predicts long-term U.S. GDP growth to average around 2.5 percent a year, down from the 3 percent plus the U.S. has enjoyed over the last quarter century. That may sound a slight difference, but if his prediction comes true it will have profound effects. For one thing the same low growth that has been caused by the amassing of debts will make those very debts harder to repay.