Fed Reserve Bank of Kansas City Pres: "Fed should raise interest rates"

If implemented, this would cut gold and commodities to their knees.

Just one move, as long as the threat of follow through existed, would decimate longs.

Other than his views on recovery and avoiding the double dipper, which I disagree with, I like Koenig's comments.


http://www.bloomberg.com/apps/news?pid=20601087&sid=azGAUKUgkHng

Fed Should Tighten Rates Sooner Rather Than Later, Hoenig Says
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By Steve Matthews

Oct. 6 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank should begin raising interest rates “sooner rather than later,” and such tightening wouldn’t derail the U.S. economic recovery.

“Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy,” Hoenig said today in a speech in Denver. “I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.”

Hoenig’s comments parallel those by Fed Governor Kevin Warsh, who said on Sept. 25 the Fed may need to tighten “with greater force than is customary,” and Richmond Fed President Jeffrey Lacker, who said on Oct. 1 that rates may need to be raised even with unemployment near 10 percent.

“We all know that the neutral rate is not zero,” Hoenig said. “Equally obvious to me is that a rate of 1 or 2 percent is not tight monetary policy. It is still very accommodative.”

In contrast, New York Fed President William Dudley said yesterday the central bank needs to focus in the near term on keeping rates low, citing concern inflation could slow too much.

The Federal Open Market Committee said last month the U.S. economy has “picked up” following the deepest recession since the 1930s. Officials slowed the purchase of $1.45 trillion in mortgage-backed securities and housing debt, while pledging to keep the benchmark interest rate near zero for an “extended period.”

Economy Shrank

Economic growth will average 2.6 percent in the second half of this year, according to a Bloomberg News survey of economists last month. The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year, according to government figures.

The U.S. jobless rate climbed to 9.8 percent in September, from 9.7 percent in August, the Labor Department reported on Oct. 2. September’s losses bring total jobs lost since the recession began in December 2007 to 7.2 million, the biggest decline since the Great Depression.

“We are in recovery,” Hoenig said in the text of remarks at an economic forum hosted by the bank’s Denver branch. Stimulus to the economy will probably “prevent a double-dip recession.”

“Consumer confidence is rebounding, and we are starting to see improvement in business and manufacturing,” he said. “Additionally, yield spreads between low-risk assets, such as Treasuries, and higher risk assets are narrowing.”

Almost Zero

The Fed lowered its main interest rate almost to zero in December, switching to asset purchases and credit programs as the main policy tools. Chairman Ben S. Bernanke is leading plans to buy $1.25 trillion of mortgage-backed securities and as much as $200 billion of federal agency debt by March, along with $300 billion of long-term Treasuries by October.

Hoenig also called for Congress to address the problem of creating a resolution mechanism for banks that are so large they could, in the event of failure, damage the financial system. A proposal before Congress for a regulatory overhaul is inadequate, he said.

“The proposal does not adequately address the too-big-to- fail problem in that it still provides too much latitude to rescue failing firms,” he said. “It confirms the practice of addressing failure of the largest firms in an ad hoc manner with individuals rather than the rule of law deciding which firms get rescued and which do not.”

Hoenig, the Kansas City Fed’s president since 1991, is the longest-serving Fed policy maker.

To contact the reporter on this story: Steve Matthews in Mobile at smatthews@bloomberg.net
Last Updated: October 6, 2009 21:45 EDT

 

I think the Fed will not allow the dollar to plummet into oblivion. I bet there's a small, sybolic rate hike on it's way in the coming months. Maybe a .25 bp hike that wouldn't do alot of damage to the mkts, but would keep everyone guessing/expecting fed to tighten further at each FOMC meeting. America does NOT want to lose reserve currency status, it will cause so many problems for us. I don't care what anybody says, we (US consumers and US govt) cannot afford to let the dollar become a shite currency, especially due to debt issuance. If this IMF global currency is pushed through, our ability to sell trillions of dollars worth of treasuries will end...and we cannot have that now, can we?

 

I have a significant precious metal position as a hedge against my cash position and would welcome a rate hike by the Fed and the ensuing downdraft in gold.

 

If you pay enough attention, this whole horse and pony show of one Fed Governor jawboning a shift in policy from the consensus has been going on for years. It's just a feeble attempt to maintain this notion that they are vigilant and forward looking.

It often coincided in the past with major runs in oil, commodities and gold along with some dollar weakness.

 

This guy is a torpedo aimed at the US economy. The Taylor rule suggests FF should be anywhere from 0.5% to -5%, where he is getting that 1-2% is accomodative is a mystery

 

They will need to hike beyond 1% to slow it down. They are afraid of gold skyrocketing, it is already up some 40 pts, this week.

Situation does not look pretty for them at all.

 

LOL at thinking a 25 or 50 bp hike in FF would do anything to damage the economy or markets. It would strictly be a symbolic move to help the $ and ease the commodity run.

The RBA hiked on Tuesday and the Aussie market (along w/the rest of the world) had a massive rally.

 

Greenback - the new carry-trade ?

 

Does the RBA own 1/4(or whatever it is) of their gse MBS market?Do they own trillion in securities?Are their banks holding 6% of GDP in excess reserves?

There is a difference between a central bank hiking when the CB dont own squat and banks are lending freely. In the case of the US a hike would get the market immediatly thinking a massive selling wave is about to start. Effectively sending mortgage rates soaring and killing housing.

Hiking .25 .50 would signal 'we lied about extended period', CB loses credibility. There wouldn't be much bidding some issues of GSE debt or MBS because no one would know where the floor is with a huge seller

 

That's a good one. I wasn't aware that the Fed had any credibility to lose.

We sit on the precipce (sp?) of a run on the dollar and an explosive move up in equities and commodities. If (a big IF) this continues, the Fed will be hiking by early Spring at the latest.