Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

The lonely voice: Fed bank president calls for rate hikes 'by the end of summer'

June 3, 2010 | 12:33 pm

Thomas Hoenig, the head of the Federal Reserve Bank of Kansas City, is cementing his reputation as the best friend of savers with money in the bank.

Hoenig, who has a seat on the Fed’s policymaking Open Market Committee, on Thursday called for the central bank to raise its benchmark short-term interest rate to 1% “by the end of summer,” from the current range of zero to 0.25%.

Hoenig has been agitating all year for the Fed to begin boosting interest rates, arguing that the economic recovery was sustainable and that the central bank risked setting the scene for high inflation if it kept rates too low for too long. Any rise in rates would help savers who are earning next to nothing on bank deposits.

Hoenig But Hoenig is a lonely voice on the Fed committee: He has been the only dissenter at the three Fed meetings so far this year, as the rest of the committee has gone along with Chairman Ben S. Bernanke’s policy of promising to maintain rock-bottom rates “for an extended period.”

In a speech April 7, Hoenig called for the Fed to begin moving to 1% on its benchmark federal funds rate “sometime soon.”

He got more specific in a speech Thursday, saying the Fed should move toward “normalization” of policy by first removing the “extended period” commitment on near-zero rates, and then should “be prepared to raise the funds rate target to 1% by the end of summer.

“We would then pause, maintaining the funds rate at 1% while we assess the economic outlook and emerging financial conditions,” Hoenig said.

The Fed has three summer meetings scheduled: June 23, Aug. 10 and Sept. 21. So if Hoenig were to prevail the benchmark rate would be 1% by Sept. 21.

But the chances of the rest of the Fed committee going along with Hoenig seem slim to none at this point -- barring a rip-roaring U.S. economy this summer and a fast end to Europe’s debt crisis.

Dennis Lockhart, who heads the Fed's Atlanta bank, said in a speech Thursday that although "the time is approaching when it will be appropriate to consider recalibrating interest rate policy, I do not believe that time has yet arrived."

Futures traders who bet on Fed moves now see a 73% probability that the central bank will still be holding its key rate in the zero-to-0.25% range at the Sept. 21 meeting.

If so, count on a 100% probability that Tom Hoenig will still be dissenting.

-- Tom Petruno

Photo: Kansas City Fed President Thomas Hoenig. Credit: Federal Reserve