Fed’s Hoenig says significant weakness in US economy

A Federal Reserve official said on Monday that the U.S. economy faced "significant weaknesses" and urged policymakers to allow large financial institutions to fail if needed.

"We still have significant weaknesses to work through in the economy in the U.S.," Kansas City Fed President Thomas Hoenig said at a central bank event in Abu Dhabi, the capital of the United Arab Emirates.

Data showed last week that U.S. consumer sentiment had soured in early November on grim job prospects while a larger-than-expected trade deficit had analysts scaling back estimates for third-quarter U.S. economic growth. [ID:nN13463684]

Turning to regulatory issues, Hoenig said that all financial institutions needed to be allowed to fail, no matter their size.

"Our institutions must be allowed to fail no matter what their size or political influence," he said.

"Our reluctance to deal with 'too big too fail' provides these largest institutions with important advantages over any competitors who are not seen as important."

Hoenig also put the spotlight on credit ratings agencies, saying policymakers needed to examine fee structures and incentives, and called into question how the agencies earned fees from the companies they are supposed to rate in an objective manner.

"Even if we put regulatory restrictions on the rating agencies trying to make them behave, incentives overwhelm. Incentives always overwhelm," he said.