Fed's Hoenig says must tighten policy sooner rather than later, Gold price cool
Thu Jan 07, 2010 by The Reuters Breaking News Source: http://bigcapital.wordpress.com "Gold slipped on Thursday after reaching a three-week high above $1,140 per ounce the previous day, weighed down by investors' caution ahead of U.S. non-farm payrolls data. The non-farm payrolls data is expected to shape expectations for when the U.S. Federal Reserve will start tightening its ultra-loose monetary policy, which could set the direction of the dollar. In a similar vein, Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, gave a speech today in which he emphasized the importance of the normalizing interest rates sooner rather than later." WASHINGTON -- The Federal Reserve should start tightening monetary policy -- spelling higher U.S. interest rates -- "sooner rather than later," said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, on Thursday. "The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal-funds rate target from zero back to a more normal level, probably between 3.5% and 4.5%, and restore its balance sheet to pre-crisis size and configuration," Hoenig said in a speech at the Central Exchange in Kansas City. Hoenig will be a voting member of the Federal Open Market Committee, the panel charged with setting interest-rate policy, this year. The Federal Reserve should tighten policy sooner rather than later to contain longer-term inflation pressures and avoid sowing the seeds of the next crisis, a top Federal Reserve policy-maker said on Thursday. The U.S. and world economies appear to be in the early stages of recovery, Federal Reserve Bank of Kansas City President Thomas Hoenig told a conference at the Central Exchange in Kansas City. In the U.S., labor market conditions have begun to stabilize and the housing market shows signs of recovery, he said. "While there is considerable uncertainty about the outlook, the balance of evidence suggests that the recovery is gaining momentum. In these circumstances, I believe the process of returning policy to a more balanced weighing of short-run and longer-run economic and financial goals should occur sooner rather than later," Hoenig said. "We cannot afford to be short-sighted," he said. The Fed cut its benchmark federal funds rate to near zero in December 2008 and created a host of emergency lending facilities and bought mortgage-related to fight the worst recession in more than 70 years. It has pledged low rates for an extended period. "If we leave it (the fed funds rate) there too long, then we will invite a new set of instabilities or inflation," Hoenig said in response to an audience question. Hoenig, who is seen as one of the more hawkish, or anti-inflationary, policymakers at the U.S. central bank, and is a voting member of the Fed's rate-setting committee this year. He has warned about the risk of keeping interest rates too low for too long before, including in a speech last October. "Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation, and more unemployment -- not today, perhaps, but in the medium and longer run," Hoenig said. Most analysts don't expect the Fed to raise interest rates until the second half of 2010. Hoenig also argued that keeping short-term interest rates near zero could actually hurt the recovery process in financial markets. With a low federal funds rate and a small spread between the discount rate and the rate paid on excess reserves, banks are more inclined to transact with the Fed instead of with each other. That prevents the interbank markets from working effectively, Hoenig said. Low rates also distort longer-term saving and investment decisions, he added. "While I agree that unemployment is unacceptably high and short-term inflation risks are likely small, we must also recognize what monetary policy can and cannot do," he said. Monetary policy is not an appropriate tool for addressing structural unemployment problems, Hoenig argued. The Fed's tough task as the economic recovery gains traction will be to curtail its emergency credit and financial market support programs and "raise the federal funds rate target from zero back to a more normal level, probably between 3.5 and 4.5 percent, and restore its balance sheet to pre-crisis size and configuration," Hoenig said.
