March 30, 2011 / 5:34 PM / 8 years ago

Hoenig urges Fed to shrink holdings, raise rates

LONDON (Reuters) - An inveterate Federal Reserve advocate of tighter financial conditions on Wednesday renewed his call for higher benchmark interest rates and shrinking the Fed’s balance sheet to pre-financial crisis levels.

“With the United States and many world economies experiencing ... growth and with the U.S. financial crisis over, I would expect to see a change in policy in which stimulus put in place at the height of the crisis would be throttled back,” Kansas City Federal Reserve Bank President Thomas Hoenig said in a speech to the London School of Economics.

Hoenig is not a voter on the Fed’s policy-setting Federal Open Market Committee this year.

The Kansas City Fed chief has previously called for a modest increase in borrowing costs and expressed his opposition to the Fed’s $600 billion bond buying program. His questioning of Fed policy adds to the voices of several other Fed officials who have in recent days called for the program to be scaled back or for the U.S. central bank to tighten financial conditions soon.

The Fed chopped rates to zero in December 2008 and will have bought a cumulative $2.3 trillion in longer-term securities to spur U.S. economic growth when its latest bond-buying program winds up at the end of June.

Despite skepticism from Hoenig and others about the Fed’s ultra-easy money, the U.S. central bank is on track to see its most recent securities purchases through to conclusion. The Fed has given no indication it is in any hurry to shrink its balance sheet.

Most analysts do not expect the Fed to begin raising interest rates until the second half of next year.

The Fed’s adherence to an exceptionally accommodative stance puts it at odds with other major central banks around the world that have begun to tighten financial conditions or are poised to do so in the near future.

Hoenig said the Fed’s own policies may be fueling global commodity price rises, a position that challenges the view of Fed Chairman Ben Bernanke, who has said rising food and energy costs are due to expanding demand in fast-growing emerging economies.

“While some of the increase may reflect global supply and demand conditions, at least some of the increase is driven by highly accommodative monetary policies in the United States and other economies,” he said.

The Kansas City Fed chief said there is already evidence Fed policies are fueling imbalances and inflationary pressures.

“The longer policy remains as it is, the greater the likelihood those pressures will build and ultimately undermine world growth,” he said.

Hoenig said the neutral level of U.S. interest rates is probably about 2 percent.

He also said that failure to rein in the U.S. budget deficit would endanger long-run price stability.

“If you ask most Americans they are adamant we need to take care of the debt and the deficit,” he said in response to questions after speaking.

“If you don’t ... you do endanger your long-term inflation outlook even more.”

Reporting by David Milliken, writing by Mark Felsenthal; Editing by Padraic Cassidy

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