Hoenig Blames Fed for Rising Commodities, Urges Tightening

Federal Reserve Bank of Kansas City's Thomas Hoening
Thomas Hoenig, president and chief executive officer of the Federal Reserve Bank of Kansas City. Photographer: Jin Lee/Bloomberg

The Federal Reserve’s “highly accommodative” monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon.

“Once again, there are signs that the world is building new economic imbalances and inflationary impulses,” Hoenig, the central bank’s longest-serving policy maker and lone dissenter at meetings last year, said in a speech today in London. “The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.”

Fed policy makers, who affirmed plans on March 15 to buy $600 billion in Treasury securities through June, disagreed this week over whether to curtail the purchases, end them early or keep the program in place. St. Louis Fed President James Bullard said the plan may need to be cut by about $100 billion. The Boston Fed’s Eric Rosengren said that high unemployment and low core inflation mean it’s still too soon to withdraw record monetary support for the economy.

The Federal Open Market Committee “should gradually allow its $3 trillion balance sheet to shrink toward its pre-crisis level of $1 trillion,” Hoenig, 64, said in his remarks at the London School of Economics and Political Science. “It should move the U.S. federal funds rate off of zero and toward 1 percent within a fairly short period of time.”

Improving Trends

“Policy should acknowledge the improving economic trends and begin to withdraw some degree of accommodation,” he said. “If this is not done, then the risk of introducing new imbalances and long-term inflationary pressures into an already fragile recovery increase significantly.”

Other Fed officials, including Chairman Ben S. Bernanke, have rejected the idea that their policies fueled gains in commodity prices, pointing instead to rising demand among emerging-market economies and disruptions in supplies.

Bernanke, in testimony to Congress on March 1, said commodity prices “have risen significantly in terms of all major currencies,” and not just the dollar.

As of yesterday, crude oil jumped 35 percent over six months as turmoil in the Middle East threatened to disrupt supplies. Corn rose 38 percent, and cotton climbed 89 percent.

In its March 15 statement, the FOMC said the economic recovery “is on a firmer footing.” It said the effects of higher fuel and commodity costs on inflation will be “transitory,” and officials “will pay close attention to the evolution of inflation and inflation expectations.”

Adding Workers

Companies in the U.S. added more workers in March, a sign the labor market may be strengthening, data from a private report based on payrolls showed today. Employment increased by 201,000 workers, according to figures from ADP Employer Services.

Other data released this week point to challenges for the recovery. Confidence among U.S. consumers dropped more than forecast this month as fuel costs surged to the highest level in more than two years, according to the Conference Board’s confidence index yesterday. Another report showed home prices in 20 cities fell in January by the most in more than a year, raising the risk that sales will keep slowing.

Fed officials have purchased $1.7 trillion of mortgage debt and Treasuries through March 2010 to pull the U.S. out of the recession. The Fed’s second round of purchases, announced in November, has come under fire from Republican leaders in Congress who say it risks inflating asset-price bubbles and stoking inflation.

Eight Dissents

As a voting member of the FOMC last year, Hoenig dissented against the Fed’s pledge to keep rates “exceptionally low” for “an extended period,” the decision to reinvest proceeds from maturing mortgage-backed securities, and the current round of bond purchases. His eight straight dissents tied former Governor Henry Wallich’s record in 1980 for most dissents in a single year.

“You have to remember I’m not advocating tight monetary policy,” the regional bank president said in response to audience questions after his speech. “I’m advocating a non-crisis policy. Zero is a crisis policy that by itself should be temporary.”

A neutral level for the fed funds rate in the long run is likely more than 2 percent, Hoenig said. Neutral refers to a level for the Fed’s interest-rate target for overnight loans between banks that neither over-stimulates nor unnecessarily slows the pace of the economy.

“You can’t measure precisely neutral any more than you can precisely measure the long-term sustainable unemployment level, but you can estimate it over a long period,” he said. “I don’t know exactly what that is. Probably above 2 percent.”

Hoenig is retiring on Oct. 1 after a 20-year career as leader of the Kansas City Fed, one of the Fed’s 12 regional banks. The Kansas City Fed has begun a search for his successor.

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