The President of the Federal Reserve Bank in Kansas City, Thomas Hoening, believes the Feds should end its purchases of motgage debt in March.

Hoenig said last week’s report showing the economy lost 85,000 jobs in December doesn’t change his outlook for growth of 3 percent to 3.5 percent this year. The central bank should consider raising its target rate for overnight interbank lending from a record low even with unemployment at 10 percent, he said.

“The preponderance of evidence, I think, is for a modest and persistent recovery,” Hoenig said during an hour-long interview. “Weather may have had some effect on those numbers” of lost jobs. “We have a lot of stimulus coming into the economy, still.”

U.S. central bankers debated increasing and extending asset purchases should the economy weaken, with a few favoring the move and one seeking a reduction, minutes of their Dec. 15-16 meeting showed. They pledged to complete $1.25 trillion in purchases of mortgage securities and $175 billion of agency debt by March, while holding the benchmark interest rate in a range of zero to 0.25 percent for an “extended period.”

“The Federal Reserve has announced that program ends and I think it should,” Hoenig said. “The private market now is healing. As we adjust the supply and demand in the housing market, the market should be allowed to do so.”

“If we are the market, I think we are interfering with the market’s ability to reassert itself,” he said.

Low Rates

Policy makers, at their planned Jan. 26-27 meeting, should talk about their pledge to keep rates low for an “extended period,” Hoenig said.

“It should be discussed,” Hoenig said, without commenting on whether “extended period” should be dropped or altered. “It is a discussion that everyone will be engaged in, I am sure.”

The regional Fed bank chief last week said the central bank should move “sooner rather than later” to reduce record amounts of stimulus, with a goal of boosting the benchmark interest rate eventually to “probably between 3.5 and 4.5 percent.” He didn’t give a timeframe.

Unemployment near a 26-year high shouldn’t stop the Fed from raising rates from near zero, where they could lead to higher inflation in a few years, he said.

‘Assure the Markets’

“The answer is yes, at 10 percent you can, given you are at zero,” Hoenig said. “At 1 percent you would still have a highly accommodative, historically accommodative, policy. We need to think about and assure the markets we are aware of longer term implications” of low rates.

Hoenig, 63, has led the Kansas City Fed since 1991, making him the central bank’s longest-serving policy maker. Hoenig dissented from interest-rate votes four times since 1995, always for tighter policy.

Economists surveyed by Bloomberg News last month predicted the Fed won’t raise interest rates until August.

Fed officials are hesitant to remove stimulus amid high unemployment. Atlanta Fed President Dennis Lockhart said in a speech today that the recovery will be slow and the banking system is still weakened, warranting low interest rates until the economy shows “momentum.”

Boston Fed President Eric Rosengren said Jan. 8 that slow job growth will make “accommodative monetary policy” appropriate, while St. Louis Fed President James Bullard said in October that a falling unemployment rate was a precondition to tightening.

Excess Capacity

Hoenig said that while excess capacity will keep inflation low this year, interest rates below the level of inflation can cause an increase in pressure behind higher prices.

“Of course I am worried about it two or three years down the road,” he said. “Monetary policy is about tomorrow. It is hard to keep that in mind when you have 10 percent unemployment.”

Economists anticipate the jobless rate will exceed 10 percent through the first half of this year, according to the median forecast in a Bloomberg News survey last month.

The U.S. unexpectedly lost 85,000 jobs in December, and revisions showed payrolls increased the prior month for the first time in almost two years, a report from the Labor Department in Washington showed. The jobless rate stayed at 10 percent in December.

Peak Unemployment

Since World War II, the Fed has waited an average of six months after unemployment peaked to begin raising interest rates, and the central bank held off longer when inflation was low, Joseph LaVorgna, a Deutsche Bank Securities Inc. economist, said in a research note in November.

The Fed’s experience following the past two contractions suggests policy makers may not start to raise interest rates until early 2012, Bullard said Nov. 18.

“If you look at the last two recessions, in each case the FOMC waited two-and-a-half to three years before we started our tightening campaign,” Bullard said in a speech in St. Louis. “If we took that as a benchmark, that would put us in the first half of 2012.”

Hoenig said legislation overhauling financial regulation that was passed by the U.S. House last month is “a good first step.” The House voted to tighten rules for derivatives and create powers to break apart healthy financial firms that threaten the economy.

Hoenig said he favored a clear resolution authority to wind down firms that have been deemed “too big to fail,” rather than government bailouts with the government managing the institutions.

“The issue is how to allow institutions to fail in an orderly fashion,” he said. “We are tying ourselves up in minutiae of managing bonuses.” Winding down institutions is “a much better solution than micromanaging,” he said.

Source: Bloomberg