Fed's Hoenig worried on inflation; Evans not

WEST LAFAYETTE, Indiana Fri Apr 15, 2011 3:58pm EDT

Kansas City Federal Reserve President Thomas Hoenig speaks regarding ''Ending Government Bailouts'' at the American Economic Association Conference in Atlanta, Georgia January 5, 2010. REUTERS/Tami Chappell

Kansas City Federal Reserve President Thomas Hoenig speaks regarding ''Ending Government Bailouts'' at the American Economic Association Conference in Atlanta, Georgia January 5, 2010.

Credit: Reuters/Tami Chappell

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WEST LAFAYETTE, Indiana (Reuters) - To judge by their polar opposite reactions, two top U.S. Federal Reserve officials could have been looking at completely different sets of U.S. inflation data on Friday.

That's largely because they were.

Chicago Fed President Charles Evans said the rise in the March U.S. Consumer Price Index data was "in line with low underlying inflation," referring to core CPI, which rose 1.2 percent from a year earlier.

Evans, a voter on the Fed's policy-setting committee, said strong monetary accommodation remains necessary as the U.S. economy improves, and it's unlikely he will push for tighter policy this year.

His view is in line with that of core members of the Fed, including Chairman Ben Bernanke, who has said the effect of the rising price of oil on inflation is "transitory."

Kansas City Fed President Thomas Hoenig, one of the Fed's most consistent hawks, repeated his call for the Fed to put short-term interest rates back up to 1 percent, from near-zero where they are now.

Speaking to an audience at Purdue University in Indiana, he said he was worried about inflation, which he said Friday's data showed was growing "robustly."

"Total inflation is what I worry about -- it has food, which we all basically want and need, and it has energy, which we all basically want and need," Hoenig said.

Headline inflation rose 2.7 percent year on year in March, data on Friday showed, the biggest gain since December 2009.

"There is a reasonable argument that it is a temporary thing," he said, "but it is also perhaps related to the fact that monetary policy has accommodated some of those increases."

The Fed should begin normalizing policy soon and not wait too long before making adjustments, or otherwise risk tipping the economy back into recession, Hoenig said.

"There are two things: the size of the adjustment will be a factor, and the duration before we introduce the adjustment will be a factor," Hoenig said. "I think the smaller, the sooner, then you get expectations generated and you get people thinking, 'I'd better match my assets and liabilities because if I don't I'm going to find myself in trouble'."

The economic recovery is gathering steam, and rising commodity prices are stirring up anxiety about inflation around the world and throwing into question how and when the Fed will begin to tighten monetary policy. The European Central Bank has already taken steps in that direction.

But Hoenig is in the minority at the Fed, which analysts expect to complete a $600 billion bond-buying program in June and to hold off from rate increases until next year.

Evans's comments underscored those expectations.

"As long as core inflation year over year is 1.5 percent or lower, I'd be surprised if I'm advocating a tightening in policy" in 2011, Evans told reporters on the sidelines of the annual Hyman P. Minsky conference in New York.

"At the moment I think that what's going on with food, energy and commodity prices is a relative price adjustment due to stronger global demand around the world, and some one-off supply effects ...," he added.

"Those are one-off or transitory effects and it's much too early to say that they've got embedded in underlying inflation."

Inflation is not yet at a "tipping point," Evans said.

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Comments (2)
Ira_Derntosei wrote:
No disrespect to the author of the article, but substantively, this article isn’t worth reading. We all think these smart guys sit around pouring over data, the jobless numbers, inflation indices, etc., but all they do is ask their member banks what they’d like to do and spend the rest of their time figuring out how to spin the deal while preserving the illusion of being economic geniuses. I can just see Bernanke asking his assistant to grab the latest report on factory orders so that he can set his coffee mug down without staining the surface of the beautiful cherry table in the board room.

Apr 16, 2011 5:04pm EDT  --  Report as abuse
Ira_Derntosei wrote:
“Kansas City Fed President Thomas Hoenig, one of the Fed’s most consistent hawks, repeated his call for the Fed to put short-term interest rates back up to 1 percent, from near-zero where they are now.”

I like it when they play “Good Cop/Bad Cop” for a good show. Everyone who understands the founding and structure of the Federal Reserve knows that 1) it isn’t Federal and 2) it isn’t a reserve, 3) it does not serve the public interests, but solely the interests of its member banks. Simply put, it is the formalization of a banking cabal. Translation, it answers to the banks and the banks would implode because of “duration mismatch” of interest due to fractional reserve lending and the gross disparity between the long term lending practices (20-30 year low interest mortgages being the main tool) and short term funding (1-3 year CDs). The conclusion is obvious, the Federal Reserve will not, CAN NOT, raise the Federal Reserve Discount Lending Rate, nor can it retract money put into circulation. Actually, it’s unlikely that it can even reduce the rate at which it puts money into circulation, anymore than an alcoholic can put down that bottle of Jack Daniels.

My point, the Kansas Fed is simply a ruse making us think that the Federal Reserve will even consider raising their rate, or slowing their printing presses. That doesn’t mean we, the people, will get low interest rates, or that they will not continue to go up on new loans, it just means that for the next 20-30 years the Fed will print and lend money hand over fist at a low cost to the banks.

Side thought, I wonder if they still make their 10ยข on the dollar from the Treasury for putting new money into circulation…?

Apr 16, 2011 5:14pm EDT  --  Report as abuse
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