A Federal Reserve official said on Tuesday that while the US economy is clearly rebounding, it is too soon to begin to withdraw the Federal Reserve’s massive support.
“I see nothing that conflicts with the widely held opinion that we are in recovery,” Kansas City Fed President Thomas Hoenig said at an economic conference. “I would not support a tight monetary policy in the current environment.”
However, he warned that it would be important for the Fed to pull back from its ultra-low interest rates and withdraw the vast amounts of cash it has put into the financial system before igniting inflation.
“Monetary policy has to think ahead a year, or more,” he said in his written remarks.
Hoenig cautioned that benchmark interest rates, which are now near zero, would be accommodative even at 1 percent or 2 percent.
“My experience tells me that we will need to remove our very accommodative policy sooner rather than later,” he said.
Besides cutting interest rates, the Fed has more than doubled the size of its balance sheet as it has sought to pull the US out of the worst financial crisis since the Great Depression.
Despite a move by Australia’s central bank to raise its benchmark interest rate, most economists don’t expect the Fed or other major central banks to follow Australia’s lead and raise rates anytime soon.
When it comes to higher rates, “Australia may prove to be an isolated case,” said Geoffrey Yu, a London-based currency strategist for UBS, given its much stronger recovery.
One restraint on many countries will be exchange rates, several analysts said: If they get too far ahead of the Federal Reserve, their currencies will rise relative to the dollar, as investors seek out higher interest rates.
That, in turn, would make their exports to the US more expensive.
That will cause some countries, such as Switzerland, Canada and New Zealand, to delay raising rates for as long as possible, Yu said.
William Dudley, president of the New York Fed, on Monday reiterated that the central bank would keep rates “exceptionally low ... for an extended period.”
Both the European Central Bank (ECB) and the Bank of England, meanwhile, are expected to keep their benchmark interest rates at their respective historic lows of 1 percent and 0.5 percent when they announce their decisions today.
Last week, ECB president Jean-Claude Trichet indicated that it is too early to consider raising interest rates.
When world leaders from the G20 met in Pittsburgh, Pennsylvania, they pledged to maintain low interest rates and other stimulative measures. They also agreed to coordinate the reduction and removal of those measures.
But Yu said most central banks would set interest rates in response to domestic needs, while coordinating on other measures, such as unwinding emergency lending programs that support banks.
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