Fed officials at odds on how long to keep rates low

Federal Reserve Board Chairman Ben Bernanke testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress'' on Capitol Hill in Washington February 25, 2010.

NEW YORK (Reuters) - Top Federal Reserve officials on Tuesday offered differing messages about the direction of monetary policy, with one flagging the dangers of keeping interest rates too low for too long and another saying the economy was too weak to raise them.

Thomas Hoenig, head of the Kansas City Fed, told CNBC television that the central bank's commitment to keep interest rates low for an extended period of time could "invite speculation" in financial markets.

"When you have zero rates that go on indefinitely, you are inviting future problems," Hoenig said. "We know that zero is non-sustainable ... the market already knows that." Hoenig has argued he would like to see rates move higher sooner rather than later.

But Richard Fisher, of the Dallas Fed, said that while liquidity measures were slowly being unwound, the time was not yet right to begin tightening monetary policy.

"I don't think that's going to happen for some time," Fisher told PBS in an interview. "We have an anemic recovery."

The Fed not only slashed interest rates to near zero to combat the worst financial crisis in generations, but also undertook a host of unorthodox steps such as outright debt purchases.

Outstanding credit to the banking system has more than doubled since the start of the crisis to over $2.3 trillion.

Minneapolis Fed President Narayana Kocherlakota, for his part, said the Fed's massive credit injections into the financial system made it all the more crucial to time the withdrawal of such stimulus just right.

"Where we are right now is a rather extreme form of where we are at the end of every recession -- trying to figure out when exactly to get this timing right, of ending a period of accommodation," he told a group of business executives in answer to a question from the audience.