Hoenig, during a presentation Tuesday evening in Denver, called inflation’s creep serious and even reminiscent of the 1970s and early 1980s.
The near $124-a-barrel price of oil Wednesday amplified his concerns about the potential for rising energy and commodity prices to rekindle inflationary expectations.
As head of the Federal Reserve Bank of Kansas City, Hoenig serves as a nonvoting member of the Federal Reserve’s policy committee, which cut interest rates last week.
Many observers, particularly those concerned about rising inflation, had looked for the Fed to signal that it may be done cutting rates for a while. Two other Fed bank presidents who are voting Fed members this year dissented from the latest interest rate cut.
A string of seven rate cuts, including the quarter-point cut last week, has slashed the Fed’s benchmark rate to 2 percent from 5.25 percent in September.
Hoenig, according to a text of his address to the Economic Club of Colorado, is looking ahead to when the Fed may need to raise interest rates.
Hoenig noted the economy’s slowdown but repeated previous comments that recovery is likely to follow the Fed’s rate cuts and other steps as well as an increase from tax rebate checks. He is less convinced that inflationary pressures will ease.
“Some would dismiss these rising inflationary pressures as temporary. I believe they are more serious,” Hoenig told the group.
Inflationary pressures are coming from strong economic growth abroad and a weaker U.S. dollar globally, not primarily from the U.S. economy, he said. This is why inflation has risen even as the U.S. economy has slowed.
Hoenig said rising inflationary pressures also are beginning to rekindle “an inflation psychology to an extent that I have not seen since the 1970s and early 1980s.”
Surveys have shown businesses are passing along higher input and commodity prices to consumers, he said.
“In this environment, in my opinion, there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,” Hoenig said.
Policy tightening means higher interest rates from the Fed.
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