Kansas City Fed Bank President Says Cut Debt, Be Firm On Interest Rates

President of the Kansas City Federal Reserve, Thomas Hoening said in a speech given at the annual meeting of the Kansas Banking Association that actions need to be taken in reducing the nation’s debt, both federal and consumer.

The speech, which Hoening gave at the meeting about a month ago, was released Friday.  His comments also touched on the ever increasing money supply and the need for the Federal Reserve to be firm when it comes to raising interest rates.

Hoening stated that the Federal Reserve’s policy of low interest rates aims toward spurring growth in the economy, but also leads to further borrowing, which just adds to the nation’s debt problems.

Such policy also leads to an increased money supply which weighs on the purchasing power of the nation’s currency.

Hoening, who is known as one of the Fed’s leading advocates for low-inflation policies, believes without tending to excess debt levels the Fed will feel pressure to keep its target rate low, which increases the risk of inflationary issues in the future.

“As we become more confident that we are at the bottom of the recession and are moving into recovery, we must become more resolute in systematically reducing our balance sheet and raising interest rates,” Hoenig told the annual meeting of the Kansas Bankers Association.

Hoening also addressed the “too big to fail” label that America’s largest banking institutions receive. The issue is that the top 20 banking institutions hold about 70 percent of the assets, which Hoening said has essentially given those banks an implicit government banking.  In 1990, the nation’s top 20 banks only held 35 percent of total assets.

This has also allowed those banks to get by with a 3.5 percent equity ratio to support those assets, short of the 6 percent minimum suggested by regulators Looking at the next 20 banks, the ratio is 6.5 percent, which actually puts them at a disadvantage to the largest banks as those additional funds are not being used to generate revenue.

Hoening believes our nation’s largest banks still pose a threat the economy due to the high concentration of asset holdings.

Since Hoening gave that speech the Federal Reserve has reported an increase in its balance sheet every week. The latest report showed total bank reserve credit hit $2,070 billion as of September 2010.