Fed's Hoenig Fears Emerging Inflation

On a day the government reported a big jump in consumer prices, one of the Federal Reserve’s top inflation hawks said Thursday he sees signs that his warnings about higher inflation may be coming true.

“One month's data is one month's data--it doesn't tell you if you have an inflation problem,” said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in an interview with FOX Business. “But I will say, on top of December's numbers, there (are) indications that inflation is rising slowly, modestly--but still rising. And with a highly accommodative monetary policy, I think you should, over time, expect inflation to rise.”

The Labor Department reported Thursday that consumer prices rose 0.4% in January, more than expected, mainly due to increasing food and energy prices. The so-called “core” inflation rate, which excludes food and energy prices, which can be volatile, was 0.2%, also more than expected--and the biggest gain since October 2009.

On Wednesday, the department reported wholesale prices advanced 0.8% in January and that core wholesale prices jumped 0.5%, their fastest pace in more than two years.

“The issue with inflation is that it always is very small increases,” Hoenig said. “People think of inflation as, ‘One day it's not here, and the next you have roaring inflation.’  It doesn't work that way.  It starts slowly, perhaps as we're seeing now, and builds over time.  And you have to anticipate that.”

Also Wednesday, the Fed released the minutes of the January meeting of its policymaking body, the Federal Open Market Committee. The minutes show members expressed few worries about a burst of higher inflation, especially given continued high unemployment, the soft housing market and excess capacity at the nation’s plants and factories.

Though the economy is on track to grow at 3% to 4% this year, the FOMC voted unanimously last month to maintain its economic stimulus programs--keeping short-term interest rates at near-zero and continuing its purchases of $600 billion in Treasury securities to help keep longer-term interest rates low, a Fed policy option known as “quantitative easing.”

In a difficult policy balancing act, the committee has taken such aggressive steps in part to encourage modest--but not excessive--inflation in the economy and avoid potentially destructive deflation, which some at the Fed feared was a real possibility because of falling prices for housing and certain other goods and services.  Over the last year, consumer prices including food and energy have climbed 1.6%, while the core inflation rate has risen just 1%.

But as a voting member of the FOMC last year, Hoenig opposed these measures at every meeting--and in fact urged his colleagues to gradually  raise short-term rates to 1% as a preemptive strike against any lurking surge in inflation.

“That's what monetary policy is about--long and variable lags--you need to anticipate that,” Hoenig said Thursday. “And that's where I'm more cautious, I guess, going forward because of my experience with inflation in the past. We always tend to want to make sure everything is going very strongly before we begin to withdraw, and I think that has its own consequences that we need to avoid.  And that's really what's on my agenda.”

Hoenig also said he would oppose any additional quantitative easing.

“I would not be encouraging that because…the economy is improving systematically now and I think on a sustainable basis,” he said. “We've been in recovery now for over a year-and-a-half and I think we need to keep that in mind as we look ahead.”