Deficit hawk Tom Hoenig says the time to raise short-term interest rates is now.
Hoenig (right), president of the Federal Reserve Bank of Kansas City, said in a speech Thursday that the Fed should be prepared to raise its fed funds overnight interest rate target to 1% from near zero “by the end of the summer.”
Hoenig has warned repeatedly this year of the danger of near-zero rates, including at April’s Fed policy meeting, to no apparent avail. Undaunted, he publicly made the case for a summer rate rise for the first time Thursday in a speech in Bartlesville, Okla.
Given the many signs of a strengthening economic recovery, “It seems reasonable that the economy would be well positioned to accept this modest increase in the funds rate,” Hoenig said in Thursday’s speech. He said both the inflation of the late 1970s and the housing bubble of the past decade show the dangers of keeping rates too low for too long.
Hoenig warned in April that the Fed risks inflating new asset bubbles and causing other economic distortions by keeping short-term rates at their current range of 0 to 0.25%. The Fed cut the fed funds target to its current level in December 2008 as the economy went into free fall following the collapse of Lehman Brothers.
Now, after 18 months of free money and several months of economic recovery, Hoenig says the time has come for the Fed to act. He sees a two-stage process in which the Fed would first eliminate its commitment to maintain “exceptionally low levels” of the fed funds rate for an extensive period.
That done, the Fed would then move the fed funds rate to 1% and then pause to assess economic and financial markets conditions. He said this would provide time to judge whether further adjustments are warranted.
That may all sound reasonable, but with Europe in flux and unemployment near 10% it’s unrealistic to expect many other members of the Federal Open Market Committee to join his crusade.
Hoenig was the only voter at April’s FOMC meeting to oppose keeping rates near zero for an extended period, and the global economic picture has only gotten cloudier since then.
Raising rates isn’t his only unpopular cause. He also noted Thursday that the problems in Greece and other debt-soaked European countries sound a warning Americans must heed.
“I would note this episode illustrates the longer run danger of running persistent deficits,” he said. He called that “a situation that we must soon address in the United States.”
Probably better not to hold your breath on that one either.
Update June 4: Thanks to several readers for pointing out that Hoenig is the KC Fed’s president, not a governor as I erroneously wrote in the original headline for this item.
