thomas m hoenig : back to the business of banking speech by mr thomas m hoenig, president of the federal reserve bank of kansas city, at the 29th annual monetary and trade conference, global interdependence center and drexel university lebow college of business, philadelphia, pennsylvania, 24 may 2011. * * * introduction today ’ s meeting and sessions are about financial reform, and i congratulate the organizers of this conference for keeping this important topic in the mainstream of discussion. much remains to be done around reform if we are to ensure a more stable financial system. topics today will focus on housing, the dodd - frank act, governmentsponsored enterprises ( gses ), the safety net and other reform efforts that necessarily follow the recent financial crisis that has so devastated our national economy. understandably, major financial interests are lobbying to change and mitigate the impact of dodd - frank or influence the reform efforts that will affect the gses. one reform effort, for example, that is especially difficult for some interests to accept is the volcker rule. this rule will restrict banking organizations from engaging in proprietary trading activities and involvement with hedge and private equity funds. it will affect the largest institutions most directly, confining their risk profile and limiting the advantages of leverage that currently drive behavior among these firms. how it is implemented will influence not only the behavior of these firms in the future but the discussion of other reform efforts yet to be undertaken. i strongly support the volcker rule and suggest it should be implemented with resolve and should be strengthened in its reach and impact. over the next few minutes, i want to outline my reasons for this position. supporting my remarks this morning is a more extensive white paper prepared with colleagues at the federal reserve bank of kansas city. this paper is posted on our bank ’ s website, www. kansascityfed. org. a brief history a fundamental characteristic of the united states is that its citizens have an enormous suspicion and distrust of concentrated power – political or financial. for nearly 200 years, state and federal laws placed limits on bank activities and resource concentration, resulting in a relatively open u. s. banking system that has served the country well. in fact, some of the largest institutions in this country started small : the bank of new york, for example, was founded, in part, by alexander hamilton, and the mellon bank was founded by a farm boy who built his own financial empire. thousands of banks, from small community

will react to whatever outcome is reached. this means that trying to quantify any particular scenario would not be useful at this point for monetary policy purposes. however, bank staff have been working to determine the channels through which our economy could be affected by changes to trade policy. it is a subtle exercise. economic theory tells us that there can be both upward and downward pressure on inflation. that is because changes to trade policy can work through multiple channels that affect both demand and supply in the economy over time. such changes can also affect asset prices and the exchange rate. whatever the outcome, we will be ready to assess the impact as it unfolds, and adjust monetary policy in a timely way, if required. taking all of these issues into account, governing council judges that while the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. continued stimulus is likely to be required for a time to take into account a number of factors. these include the effects of uncertainty related to trade negotiations, the expected effects of recent adjustments to mortgage lending policies, and the greater sensitivity of the economy to interest rates given high household indebtedness. in this context, raising the policy rate too quickly would risk stalling the expansion, and cause inflation to fall back below target. at the same time, raising the policy rate too slowly would risk a buildup of inflation pressures. governing council will therefore remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy ’ s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation. with that, governor poloz and i would now be happy to answer your questions. 2 / 2 bis central bankers'speeches