The U.S. economy is well on the path to recovery and the Federal Reserve needs to begin raising interest rates soon, Kansas City Fed President Thomas Hoenig said on Tuesday.
Reinforcing comments made last week, the hawkish regional Fed official expressed concern that the Fed's zero interest rate policy might cause bubbles.
I'm worried about it, he told a forum hosted by the Kansas City Fed. I am very much of the mind that we need to have a stable monetary policy that looks to the long run.
He again called for an increase in official rates to 1 percent from the current zero-0.25 percent range by the end of summer. Subsequent hikes should take Fed funds to around 3 percent relatively quickly, but in conjunction with gradual improvement in the labor market.
In response to the worst financial crisis in generations, the Fed slashed interest rates effectively to zero and undertook a wide range of emergency lending measures to restart frozen credit markets.
Hoenig is one of a minority of officials on the central bank's Federal Open Market Committee who fear dangerous consequences from a policy of very low rates. He has dissented in favor of weakening the Fed's promise to keep rates low for an extended period in the last three policy meetings.
The Kansas City Fed president said the nation's manufacturing sector, which has bounced back strongly from a steep retrenchment at the end of 2008 and early 2009, will continue to build on this strength.
Housing appears to have stabilized, but commercial real estate will stay weak for some time, he added.
Turning to the issue of U.S. budget deficits, Hoenig argued they are not sustainable.
Depending upon your assumptions about interest rates ... we could find ourselves growing our deficit faster than our GDP very soon. Then we're in trouble, he said.
For now, Hoenig sees U.S. gross domestic product expanding between 3 percent and 3.5 percent.
(Reporting by Carey Gillam; Writing by Pedro da Costa; Editing by Gary Hill)