June 3 (Bloomberg) -- Kansas City Federal Reserve Bank President Thomas Hoenig said the U.S. economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of the summer.
“The first step toward a more normal policy is to move policy rates off zero, back toward neutral,” Hoenig said today in a speech in Bartlesville, Oklahoma. “With the improvements in market conditions and liquidity, and with an improving outlook, the FOMC would be prepared to raise the funds rate target to 1 percent by the end of summer.”
Hoenig’s view hasn’t shifted since the European debt crisis last month posed a risk to the U.S. recovery. He urged that the funds rate be raised “toward 1 percent this summer,” according to minutes of the Fed’s April 27-28 meeting. He has voted against central bank statements, saying in April the “extended period” language limited the Fed’s “flexibility to begin raising rates modestly.”
Dallas Fed President Richard Fisher, James Bullard of St. Louis and Philadelphia Fed’s Charles Plosser have also expressed reservations about the “extended period” language. Richmond Fed President Jeffrey Lacker said last week he was “just sort of marginally comfortable” with the phrase.
In contrast, Atlanta Fed President Dennis Lockhart said today that he backed language promising rates near zero. “Waiting too long is probably less risky than moving too soon because of the tentative nature of the recovery,” Lockhart said to reporters after a speech in Atlanta.
After moving to 1 percent, the Fed should “pause” to assess the impact, with an eventual move to between 3.5 percent and 4.5 percent, Hoenig said.
Eventual rate increases are likely to be “in steps but not necessarily quarter-point” moves at each meeting, Hoenig said in response to audience questions.
“The European debt problems have increased uncertainty and a renewed aversion to risks, and are causing investors to flee riskier assets such as stocks and junk bonds for safer assets such as U.S. Treasury debt,” Hoenig said in prepared remarks for a meeting hosted by the Bartlesville, Oklahoma Chamber of Commerce. “These shifts will have a modest negative net effect on U.S. economic growth in the near term.”
Still, “there will always be reasons” for policy makers to resist raising rates as economic risks always exist, while keeping rates low could lead to asset price bubbles or inflation over time, Hoenig said in response to audience questions.
“I am not suggesting we shock our economy,” he said. “There is risk in doing nothing.”
The U.S. economy strengthened in May amid the worsening in Europe’s debt crisis, as employment likely climbed during the month by more than 500,000 workers, according to a Bloomberg News survey of economists. The unemployment rate likely dropped to 9.8 percent from 9.9 percent, the survey found ahead of tomorrow’s government report.
‘Stronger Than Anticipated’
“More recent data suggest that the recovery is more broad-based and self-sustaining, and perhaps even stronger than anticipated,” Hoenig said. “Consumer spending, which makes up more than 70 percent of GDP, has been expanding at a solid pace.”
Manufacturers continue to show a “sharp rebound,” while business spending on equipment and software has been “robust,” he said.
“We are now seeing clear signs that the process of job creation is taking hold,” Hoenig said. “Solid job gains in the months ahead will translate into a downward trajectory for the unemployment rate later this year and into next year.”
Fed policy makers raised their growth estimates for this year to a range of 3.2 percent to 3.7 percent, according to minutes of their April 27-28 meeting. The U.S. economy expanded at a 3 percent annual rate in the first quarter, as households spent more freely, the government reported last month.
U.S. policy makers say the European debt crisis poses a risk to the outlook for global economic recovery and could influence interest-rate policy. Lockhart and Chicago Fed President Charles Evans say the crisis could prompt the Fed to extend its policy of near zero rates to ensure the U.S. economy isn’t hurt by the crisis.
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