"I believe that zero rates during a period of modest growth are a dangerous gamble," Hoenig said Friday.

The Federal Reserve is undertaking a "dangerous gamble" by keeping rates at near zero for so long, and must start raising rates or risk damaging the nascent U.S. recovery, a top Federal Reserve official said on Friday.

http://www.cnbc.com/id/38693128

"To be clear, I am not advocating a tight monetary policy," Kansas City Reserve Bank President Thomas Hoenig said in the text of a speech to the Lincoln, Nebraska, Chamber of Commerce. "I am advocating a policy that remains accommodative but slowly firms as the economy itself expands and moves toward more balance."

Hoenig has been the lone dissenter on the Fed's policy-setting panel, which on Tuesday repeated the U.S. central bank's pledge to keep interest rates extraordinarily low for an "extended period."

The Fed took the further step of saying it would begin reinvesting cash from maturing mortgage bonds to buy more government debt. The decision reflected the Fed's concern over the slowdown in the economic recovery it helped bring about by cutting rates to near zero in December 2008 and buying nearly $1.3 trillion in mortgage-linked debt to shore up the housing market.

However, Hoenig said Friday he believes the economy "barring specific shocks and bad policy ...should continue to grow over the next several quarters."

The Fed should raise its short-term target to 1 percent, pause to wait for the economy to adjust, and then raise it to 2 percent once it is clear the recovery is on a reasonable growth path, he said, repeating a proposal he has made before.

"I believe that zero rates during a period of modest growth are a dangerous gamble," Hoenig said Friday.

http://www.cnbc.com/id/38693128

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City:The US must fix its growing debt problems or risk a new financial crisis

Lone voice warns of debt threat to Fed
By Alan Rappeport in Washington

http://www.ft.com/cms/s/0/c918b8dc-1b37-11df-953f-00144feab49a.html

Published: February 16 2010 20:23 Last updated: February 16 2010 20:23

The US must fix its growing debt problems or risk a new financial crisis, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned on Tuesday, adding a mounting deficit could spur inflation.

Mr Hoenig said that rising debt was infringing on the central bank’s ability to fulfil its goals of maintaining price stability and long-term economic growth. “Stunning” deficit projections were putting political pressure on the Fed to keep interest rates low, infringing on its independence at the risk of inflation, he said.

“Without pre-emptive action, the US risks its next crisis,” Mr Hoenig said in a speech at the Pew-Peterson Commission on Budget Reform.

He was the only Fed member who dissented at last month’s meeting against language indicating that interest rates should remain near zero for an “extended period”.

On Tuesday he said that the worst option for the US was a scenario where the government “knocks on the central bank’s door” and asks it to print more money. Instead, the administration must find ways to cut spending and generate revenue. He called for a “reallocation of resources” and noted that the process would be painful and politically inconvenient.

The US budget deficit is projected to be $8,000bn (€5,800bn, £5,000bn) in the next decade. Barack Obama, US president, recently lifted the government’s borrowing authority to $14,300bn.


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http://www.ft.com/cms/s/0/c918b8dc-1b37-11df-953f-00144feab49a.html