A senior Federal Reserve official said on Tuesday that an extended period of ultra-low U.S. interest rates invites speculative behavior and is risky.
When you have zero rates that go on indefinitely, you are inviting future problems, Kansas City Federal Reserve Bank President Thomas Hoenig told CNBC television in an interview.
We know that zero is non-sustainable ... the market already knows that, Hoenig said.
Hoenig, who is voting this year on the Fed's policy-setting committee, is one of the more vocal anti-inflation hawks among policymakers. He dissented at the Fed's January meeting on the issue of maintaining a pledge to hold rates -- currently near zero -- exceptionally low for an extended period, arguing the economy had improved enough to drop the language.
The Kansas City Fed chief said the Fed -- the U.S. central bank -- should be ready to raise benchmark rates, even with the U.S. unemployment rate above 9 percent.
Removing and exiting these ... quantitative easing effects is not tight policy. It's removing very substantial easing policy, he said.
The Fed is not expected to lift its low-rate long-time promise at its next meeting in mid-March because the labor market remains weak and the risk of inflation is slight. The economy is expected to have shed an additional 50,000 jobs in February and the jobless rate is anticipated to creep up to 9.8 percent, according to analysts polled by Reuters.
However, Hoenig argued that the Fed should lay the groundwork for higher interest rates.
We need to begin to prepare the market, take away the extended period language so that ... the policy rate could come up slightly, maybe as high as one percent over time, he said.
The Fed would then start draining off reserves and, later on as the economy continues to improve, allow mortgage-backed securities to roll off, he said. Active sales of assets are unlikely this year, he added.
(Reporting by Emily Kaiser, Mark Felsenthal and Pedro Da Costa; Editing by James Dalgleish and Jeffrey Benkoe)