Federal Reserve Bank of Kansas City president Thomas Hoenig said “serious” inflation pressures may compel the central bank to increase interest rates.
“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 Tuesday in the prepared text of a speech in Denver. Consumers are gaining an “inflation psychology to an extent that I have not seen since the 1970s and early 1980s,” he said.
Hoenig’s warning supports speculation among investors that the central bank has finished its series of rate cuts after seven reductions since September. Policymakers last month lowered the benchmark by a quarter point and signaled they are ready for a pause, omitting a previous reference to “downside” risks to economic growth.
“A sharp slowdown in growth has put the economy at the brink of a recession, while, at the same time, rising commodity prices have caused inflation pressures to rise considerably,” Hoenig said to the Economic Club of Colorado. He isn’t a voting member of the Federal Open Market Committee this year.
Traders anticipate the Fed will leave its main interest rate unchanged at 2 percent through October, based on futures prices on the Chicago Board of Trade.
