thomas m hoenig : monetary policy and the role of dissent speech by mr thomas m hoenig, president of the federal reserve bank of kansas city, at the central exchange, kansas city, 5 january 2011. * * * my january presentation at the central exchange, greater kansas city ’ s business women ’ s association, has become an annual event and an opportunity that i have enjoyed immensely. in particular, i want to recognize the win / win program initiated by the central exchange. i am personally a supporter of this campaign to increase the number of women on boards of directors and in executive positions in greater kansas city to a level of 20 percent by 2015. more importantly, i am a believer in the business case for gender diversity and am fortunate to have an outstanding leadership team at the federal reserve bank of kansas city. it happens that 50 percent of those positions are filled by women. currently the immediate past chairman and current deputy chairman of our board is lu cordova, an entrepreneur ’ s entrepreneur from boulder, colo. she was an outstanding chair during difficult economic and financial times. the tenth federal reserve district, and the entire federal reserve system, benefitted from her outstanding leadership. lu will be speaking here at the central exchange in march, and i encourage you to attend that program as well. today i want to discuss two related topics. first, i will outline my economic outlook for 2011. and since it is because of my outlook for the economy during this past year that i have found myself in the minority view among my colleagues at the federal reserve, i will to spend just a few minutes discussing the monetary policy process. the economic outlook as we begin 2011, recent economic data indicate a firmer tone in the outlook, and i am increasingly confident that the recovery is both sustainable and likely to gain strength over the next several quarters. that said, i expect the recovery to be moderate, with real gdp growing about 3 ½ to 4 percent a year over the next couple years. to put this outlook into perspective, it is important to remember that a major and necessary rebalancing – including the deleveraging of consumers, businesses, and financial institutions – is taking place within our economy. moreover, this is occurring while state and local governments are struggling with budgets and mounting debt loads. with these adjustments, growth necessarily will be more modest than in past recoveries. under such circumstances, the fact that we can talk about the likelihood of a sustainable recovery is highly encouraging. before turning to

sustainable long - term growth, and therefore is a threat to its independence as well. the founders of the federal reserve understood this conflict. they understood that placing the printing press with the power to spend was a formula for fiscal and financial disaster. aware of this danger, they designed our central bank to be responsible for stable prices and long - term growth, and they gave it a degree of independence so that it could carry out this mandate. the goal of policy cannot be to “ just get through ” the current challenge, but rather to rebuild the foundation of a stable and prosperous economy, looking to our nation ’ s longterm future. it is in this context that i appreciate this opportunity to address what i see as our emerging fiscal challenges. lessons from history throughout history, there are many examples of severe fiscal strains leading to major inflation. it seems inevitable that a government turns to its central bank to bridge budget shortfalls, with the result being too - rapid money creation and eventually, not immediately, high inflation. such outcomes require either a cooperative central bank or an infringement on its independence. while many, perhaps most, nations assert the importance and benefits of an independent central bank, the pressures of the “ immediate ” over the goals of the long run makes this principle all too expedient to forgo when budget pressures mount. german hyperinflation is one classic and often - cited example, and with good reason. when i was named president of the federal reserve bank of kansas city in 1991, my 85 - year old neighbor gave me a 500, 000 mark german note. he had been in germany during its hyperinflation and told me that in 1921, the note would have bought a house. in 1923, it would not even buy a loaf of bread. he said, “ i want you to have this note as a reminder. your duty is to protect the value of the currency. ” that note is framed and hanging in my office. someone recently wrote that i evoked “ hyperinflation ” for effect. many say it could never happen here in the u. s. to them i ask, “ would anyone have believed three years ago that the federal reserve would have $ 1¼ trillion in mortgage back securities on its books today? ” not likely. so i ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress. if german hyperinflation seems an unrealistic example from the distant past,