Hoenig Urges Fed to Raise Interest Rates to Encourage Saving

May 29, 2011, 12:22 AM EDT By Eric Martin

May 29 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig, the central bank’s longest-serving policy maker, said the U.S. needs to raise interest rates to encourage individuals to save and avoid future asset bubbles.

Hoenig, who doesn’t vote on monetary policy this year, has repeatedly urged the central bank to tighten lending to prevent inflation and asset price bubbles. He voted eight times in 2010 against record monetary stimulus led by Chairman Ben S. Bernanke, tying former Governor Henry Wallich’s record in 1980 for most dissents in a single year.

The Fed cut its benchmark rate to zero to 0.25 percent in 2008 to boost economic growth and will keep it unchanged until the first quarter of 2012, according to the median estimate in a Bloomberg survey of economists and analysts.

“I’m not advocating for tight monetary policy, but I do think we have to get off of zero if we want to avoid repeating some of the mistakes of the past with a very easy credit environment,” Hoenig said in an interview on CNN’s “Fareed Zakaria GPS” show scheduled for broadcast today.

Fed officials are discussing how quickly to begin tightening policy after completing the purchase of $600 billion in U.S. Treasuries by the end of June. They are also considering a strategy for how to remove stimulus, with a majority favoring ending the policy of reinvesting proceeds from maturing securities first before raising interest rates or selling assets, minutes of their April 26-27 meeting showed.

Spending Encouraged

Leaving the Fed funds target at its current level encourages consumers to spend at a time when the U.S. needs higher savings rates to ensure long-term prosperity, Hoenig said in the CNN interview.

The savings rate held at 4.9 percent in April, the Commerce Department said, the lowest level since October 2008.

The Fed under Chairman Alan Greenspan kept interest rates at 2 percent or less from December 2001 to December 2004. The savings rate averaged about 3.4 percent during that period, compared with 5.4 percent in the previous two decades, and fell to 0.8 percent in 2005, the lowest level since at least 1959, according to Commerce Department data. Defaults on home loans to the riskiest borrowers in 2007 and 2008 triggered the worst recession and financial crisis since the 1930s.

“We kept the interest rates too low,” Hoenig, who served on the Federal Open Market Committee that sets interest rates, said of those years in the CNN interview. “It’s not that I want to point blame to myself or anyone else, but I do have to say this is what happened, what were the consequences and what have I learned from it and -- and adjust policy the next time going forward.”

Bernanke, speaking on April 27 at a press conference, signaled that the central bank will maintain its record monetary stimulus after June and indicated that the need to contain inflation means further easing is unlikely.

Hoenig plans to retire from the central bank in October after 20 years as leader of the Kansas City district bank.

“If we want to be a great nation, continue to be a great nation, then we do have to address our fiscal challenges,” Hoenig said in the CNN interview, according to an advance transcript of his remarks.

--With assistance from Steve Matthews in Atlanta. Editors: Ann Hughey, Kevin Costelloe.

To contact the reporters on this story: Eric Martin in Washington at emartin21@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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