Stimulus Isn’t Needed for Recovery

Hoenig, Fisher Say Stimulus Isn’t Needed for Recovery (Update1)

By Steve Matthews and Joshua Zumbrun

July 7 (Bloomberg) -- The presidents of the Federal Reserve Banks of Kansas City and Dallas indicated the U.S. is unlikely to slide back into a recession and additional stimulus isn’t needed even as the pace of growth slows.

The Kansas City Fed’s Thomas Hoenig repeated his view that the central bank should raise its benchmark interest rate to 1 percent to stave off the risks of asset-price bubbles and inflation. The Dallas Fed’s Richard Fisher said there’s no need for additional asset purchases by the central bank.

“I am not saying raise rates to very high levels, I am saying get it off zero,” Hoenig said today in an interview in Kansas City on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. “I think we’ve done enough” to boost the economy, Fisher said in an interview with CNBC.

Their comments followed a report last week showing private payrolls increased less than forecast in June, capping a month of data signaling the world’s largest economy is slowing. Analysts including Avery Shenfeld, chief economist with CIBC World Markets in Toronto, and former Richmond Fed President J. Alfred Broaddus have said weakness in the economy increases the chances the Fed would resume expanding its balance sheet.

“We will continue to have modest, consistent growth” unless confidence falters or there is another shock to the economy, Hoenig said, lowering his forecast to “about” 3 percent this year from “above” 3 percent. “The economy will continue to move forward, just not as quickly as you would like.”

Sole Dissenter

Hoenig, 63, has been the sole policy maker to dissent this year from decisions of the Federal Open Market Committee, objecting four times to its pledge to keep interest rates at a record low for an “extended period.”

He also said the central bank should dispose of assets accumulated while fighting the crisis “as reasonably as we can, as quickly as we can.” While he has proposed raising the target for overnight loans among banks to 1 percent by September, Hoenig said in the interview that the timing “can be debated.”

Fisher indicated there’s little more the Fed can do after cutting interest rates to a record low in December 2008 and pumping more than $1 trillion into the financial system through asset purchases.

“We ought to be very careful about not going too far,” he said. “Interest rates are zero. It’s not the cost of money that’s the issue.”

Health Care

Fisher, who doesn’t vote on interest rates this year, said companies are holding back on investment because of uncertainty over government regulations in areas such as health care.

He said he expects the world’s largest economy to slow in the second half of the year as the contribution from business inventories wanes, although “I don’t think we’re going to go backwards” into another recession.

Asked about the prospect of additional asset purchases, Fisher said: “I’m not ruling it out, I’m just saying we have provided a lot of accommodation, there’s a lot of buildup of liquidity, there’s a lot of cash.”

Fisher, along with James Bullard of St. Louis and Philadelphia Fed’s Charles Plosser, has also expressed reservations about the “extended period” language. Richmond Fed President Jeffrey Lacker said he was “just sort of marginally comfortable” with the phrase.

Employment at companies rose 83,000 last month, compared with the 110,000 gain forecast by economists in a Bloomberg News survey. Including government, payrolls fell for the first time this year because of a drop in federal census workers.

Policy ‘Appropriate’

“Recent developments make me even more convinced that current policy is appropriate,” Atlanta Fed President Dennis Lockhart said June 30.

Paul Krugman, a Princeton University economist and Nobel laureate, has called for an expansion of the Fed’s balance sheet and increased government spending to spur the economy.

“We are looking at what could be a very long siege here,” Krugman said in an interview yesterday in Princeton, New Jersey. “We really are at a stage where we should have a kitchen-sink strategy. We should be throwing everything we can get at this.”

The Federal Open Market Committee last month signaled Europe’s debt crisis may harm American growth. The crisis has battered stocks, propelling a 12 percent decline in the Standard & Poor’s 500 Index from April through June, the biggest since the last three months of 2008.

Stock Rally

Stocks rallied today, sending benchmark indexes up the most since May, as the International Council of Shopping Centers said sales were growing at the fastest pace since 2006, easing concern that a slump in consumer confidence will undermine the economic recovery. The Standard & Poor’s 500 Index climbed 3.1 percent to 1,060.27.

The Fed has left the overnight interbank lending rate target at a record low of zero to 0.25 percent since December 2008. The central bank started using the “extended period” language in March 2009.

The Fed in March of this year ended its emergency purchases of $1.425 trillion of housing debt intended to hold down borrowing costs and prop up the real estate market at the center of the financial crisis.

The economy grew at a 2.7 percent annual rate in the first quarter, less than the 3 percent estimate a month earlier, according to Commerce Department data released June 25.