How does Mr. Market feel about the word hike?
DENVER (Dow Jones)--A veteran U.S. central bank official said Tuesday he's
worried about a deteriorating inflationary environment, and suggested that when
the Federal Reserve begins to raise rates, it could do so swiftly.
Federal Reserve Bank of Kansas City President Thomas Hoenig said rising
inflationary pressures are "troublesome" and a "serious" matter. "The bigger
concern is that these increases are beginning to generate an inflation
psychology to an extent that I have not seen since the 1970s and early 1980s,"
he said.
Hoenig fretted further that "there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy
tightening to reduce it." He tied rising prices primarily to overseas factors,
including a "sizable decline" in the U.S. dollar's value.
The policy maker spoke in comments prepared for delivery before the Economic
Club of Colorado. Hoenig isn't currently a voting member of the interest rate
setting Federal Open Market Committee, which many market participants believe
has neared the end of what's been an extensive campaign of interest rate
cutting.
Central bankers have since late last summer mounted a multi-fronted campaign
to protect the economy and the financial system from the profound troubles that
have been boiling out of markets and the housing sector.
Recent economic data has suggested that overall economic momentum hasn't
suffered as much as many feared, although most forecasters believe a recession
has arrived. But at the same time, fears about inflation have been mounting,
and several Fed officials have opposed interest rate cuts because of the price
environment. Hoenig appears to share some of those concerns.
Hoenig's views on the economy were relatively upbeat, even as he described the nation as being "at the brink of a recession." The policy maker suggested
interest rates were close to where they needed to be.
"The current accommodative stance should be sufficient to cushion the economy
from a deeper slowdown and the risks that financial disruptions could spill
over to the broader economy," he said. As the economy and markets improve "it
will be necessary for the Federal Reserve to remove the policy accommodation in
a timely manner."
Citing "room for optimism," Hoenig said "financial markets appear to have
stabilized somewhat, and the economy should pick up in the second half of the
year as fiscal and monetary stimulus take hold." The official said he believe
markets' role in the current turmoil has been overstated, and that higher
energy prices and housing woes have exacted the greater toll. He also said he
believes the "credit crunch" hasn't proved as damaging as some had feared.
Hoenig reckoned that housing troubles have had a "large effect" on the U.S.
gross domestic product, lowering output by 1% on average over the last two
years. The recent surge in oil prices will likely take "at least another full
percentage point off of GDP growth."
Hoenig fretted that some of the Fed's efforts to right conditions in financial
markets may be leading market participants to believe they'll be bailed out in
the future, in what's known as "moral hazard." In particular, some have fretted
the Fed's radical intervention to save foundering investment bank Bear Stearns
Cos. (BSC) in March set a bad example for market participants, and reinforces a
notion some financial institutions are too big to fail, even when they deserve
such a fate.
"Many of the steps public authorities have taken over the last year to
stabilize the financial system seem likely to weaken market discipline and
extend moral hazard problems to a much wider financial marketplace," Hoenig
said. While he said there are no "easy answers" surrounding the issue, the
"danger" for policy makers is that market participants may take riskier actions
in the future, believing they have "an added layer of protection" from the
government.
The central banker said "we will certainly reevaluate" some of the new or
expanded programs the Fed has launched to shore up financial markets. He addedexpanded programs the Fed has launched to shore up financial markets. He added
issues of moral hazard will get a "careful look."
He added a "major changes in industry practices and a significant rethinking
of financial regulation will be required if we are to avoid similar problems in
the future."
-By Michael S. Derby, Dow Jones Newswires, 201-938-4192;
michael.derby@dowjones.com |
