Fed should raise rates from near zero: Hoenig

WASHINGTON Mon Jul 25, 2011 5:11pm EDT

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WASHINGTON (Reuters) - Kansas City Federal Reserve President Thomas Hoenig, a long-standing hawk who has favored tighter monetary policy, said the Fed should raise interest rates, currently near zero, to avoid economic imbalances and asset price bubbles.

"I am not advocating for tight monetary policy," Hoenig said in testimony prepared for delivery on Tuesday to the House Financial Services monetary policy subcommittee. The testimony was posted to the committee's website.

"I'm advocating that the FOMC (the Fed's policy-setting Federal Open Market Committee) move ... to non-zero rates," he said.

Hoenig has at length opposed the Fed's ultra-loose monetary policy, which dropped rates to near zero in December 2008. He is not a voter on the FOMC this year. He dissented against easy money policies at every meeting when he had the vote in 2010.

The Kansas City Fed chief's views are not widely shared on the FOMC. The Fed in June concluded a $600 billion Treasury bond buying program aimed at boosting a weak recovery.

Fed Chairman Ben Bernanke and other Fed officials have said their next policy step will depend on how the economy evolves, and some have in fact held out the possibility that further easing might be appropriate if the weak recovery persists and inflation declines.

Last week, Chicago Fed President Charles Evans said the Fed should be thinking about possible tools for easing policy in light of the weakness of the recovery.

Hoenig said keeping interest rates near zero for so long risks creating asset price bubbles. Farm land prices in his district have doubled in the last two years, he said.

The Fed's second round of quantitative easing, referred to as QE2, drew harsh attacks from some lawmakers who said it risked setting off inflation. Political criticism of the Fed has been more muted recently as Congressional attention has shifted to the bitter fight over cutting the U.S. deficit and raising the federal borrowing limit.

A study by a congressional watchdog agency recently cautioned that conflict of interest policies at regional Fed banks could be strengthened to take into account the importance of nonbank financial firms in the U.S. economy.

(Editing by James Dalgleish)

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