Thursday, June 3, 2010

Fed Dissenter Calls for Higher Interest Rates in The U.S.

(please click to enlarge to view historical rates)

Thomas Hoenig, Kansas City Federal Reserve Bank President has called for an increase in the target federal funds rate to 1% by the end of the summer. Mr. Hoenig says the "U.S. economic recovery has the momentum to sustain itself".

He adds: “The first step toward a more normal policy is to move policy rates off zero, back toward neutral.” “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.”

He dissented from the FOMC at the Fed’s April 27-28 meeting. In fact, he voted against central bank statements, saying that the “extended period” language limited the Fed’s “flexibility to begin raising rates modestly.”

Hoenig adds that sfter raising to 1%, the Fed should pause to assess the impact, with an eventual move to between 3.5% and 4.5%, because “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,”

“These shifts will have a modest negative net effect on U.S. economic growth in the near term.”

“More recent data suggest that the recovery is more broad- based and self-sustaining, and perhaps even stronger than anticipated,” “Consumer spending, which makes up more than 70 percent of GDP, has been expanding at a solid pace.”

“We are now seeing clear signs that the process of job creation is taking hold,” “Solid job gains in the months ahead will translate into a downward trajectory for the unemployment rate later this year and into next year.”

We hope he is not looking at the census hiring numbers, or maybe the U.S. will keep doing a permanent census forever.

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