Kansas City Federal Reserve Bank President Thomas Hoenig said on Friday that current interest rates should be able to brake inflation, in a sign that he will vote to keep policy on hold for the time being.
"Monetary policy from my perspective right now is modestly restrictive. And in that context it, I think, has the ability over time to continue to bring the inflation rate down," he said after delivering a speech here to business leaders.
"Now, how fast is hard to say because monetary policy ...works with long and variable lags; it is affected by other forces ... productivity being one of those forces," said Hoenig, a voter on the Fed's policy committee this year.
"If the world dynamics change and what we call the equilibrium rate shifts ... that would effect policy going forward and whether that continues to be modestly restrictive or more than modestly restrictive," he said.
Hoenig was addressing business leaders at event hosted by the Central Exchange Education Foundation.
The Fed next meets on Jan. 30-31 and investors think it will hold rates unchanged at 5.25 percent for the fifth consecutive gathering since it halted a long rate hike campaign last summer.
Hoenig said he expected growth to pick up in 2007 while inflation receded, but made plain that he was not happy with the current level of core inflation, a measure that strips out volatile food and energy prices.
"Right now, at 2.6% year-over-year (in December), I think that is higher than where it needs to be. My own view is the core CPI needs to be much closer to 2%," he said. "For me at least you want to see assurances that that is coming down, that that is what we're going to see, and that is unsustainable going forward," he said.
"So as that begins to occur, then we can begin to talk about other choices that might be out there," he said, in a coded reference to the prospect of interest rate cuts.
Investors have progressively surrendered their hopes for lower benchmark rates this year in the face of robust economic data and consistently hawkish remarks from the Fed.
Hoenig reinforced this view with the warning that tight labor markets could feed higher wages, although he tempered this with an upbeat assessment of the ability of businesses to rekindle U.S. productivity gains, which slowed in 2006.
"The United States is a very dynamic economy and therefore I think there is a good case to be made why productivity levels will reestablish themselves in terms of 2% growth or better as we move forward," Hoenig said.
"Should those events not take place, should productivity not improve, then we would have a different dynamic in the economy," he added.