Fed Official Warns on Rate Hikes

A Federal Reserve policymaker said Friday that the central bank had to be mindful of the lagged effect of previous increases in interest rates and the risks of “overshooting” with future rate increases.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, Mo., told the Wall Street Journal that although recent inflation readings were higher than he had anticipated, they resulted from previous accommodative monetary policy.

He also said he expected inflation and economic growth to moderate in response to the most recent rate increases.

“One of the things I’ve learned is ... that monetary policy works with a lag, but it’s hard to appreciate that when you’re in the midst of the cycle,” Hoenig told the Journal.

“That’s really our challenge right now: to be careful in judging where we are in the cycle as we have removed accommodation in the past, and [ask], is that enough or do you need to go more?”

He added, “I’m still very much opposed to allowing inflation pressures to get out.... But you don’t want to be so dogmatic that you’re not taking into account ... how lagged [monetary policy’s] effects are.”

Hoenig’s comments, published on the Journal’s website, came as stock and bond markets have been rattled by recent reports of higher inflation and slower growth. The reports appeared to put the Fed in a bind over whether it should continue its 2-year-old policy of raising short-term interest rates to stem inflation.

Hoenig’s comments might bolster the views of some analysts and investors who contend that many more rate hikes are unnecessary and could throttle the economy.

Hoenig, however, is not a member of the Fed’s Open Market Committee, which sets interest rate policy.

Treasury Secretary John W. Snow said Friday that he was confident the Fed would protect growth by keeping inflation in check, and he denied that the Bush administration was softening its strong-dollar policy. Recent declines in the dollar are seen as helping to boost U.S. exports, although they could be inflationary by pushing up prices of imports.

“While it’s true that headline inflation has picked up, core inflation remains in check,” Snow said on CNBC, adding that central bank policymakers understood how vital it was that the rate of price rises remained under control.

“I have full confidence that Chairman [Ben S.] Bernanke and the [Fed] are committed to price stability and understand that this is their No. 1 priority,” Snow added.

Meanwhile, former Fed Chairman Alan Greenspan said the five-year housing boom was over, although prices would not fall nationally.

“We’re not about to go into a situation where prices will go down,” Greenspan said in response to questions Thursday evening at a Bond Market Assn. reception in New York. There is “no evidence home prices are going to collapse.”

Greenspan echoed comments made earlier in the day by Bernanke, who said that housing was undergoing a “very orderly and moderate cooling” and that central bankers were monitoring the market to help shape their analysis of the economy’s performance.