A senior U.S. Federal Reserve official said on Wednesday that interest rates kept too low for too long encourage risky financial behavior and recommended raising borrowing costs to prevent another boom and bust.
"I am confident that holding rates down at artificially low levels over extended periods encourages bubbles, because it encourages debt over equity and consumption over savings," Kansas City Federal Reserve Bank President Thomas Hoenig told a group of business people in Sante Fe, New Mexico.
"While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust," he said.
Hoenig is a voter on the Fed's policy setting panel this year and has dissented against the Federal Reserve Chairman Ben Bernanke and the U.S. central bank's promise to hold rates exceptionally low for an extended period, arguing it is no longer necessary for the Fed to tie its hands while the economy recovers.
He said on Wednesday the Fed could raise rates to around 1 percent, which would keep borrowing costs at historically low levels while sending a signal that easy money policies put in place during the crisis are steadily being pulled back.
"The time is right to put the market on notice that it must again manage its risk, be accountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy," Hoenig said.
Most Fed officials hold the view that with unemployment just under 10 percent, and the recovery still soft, there is no need to rush to raise rates.
Minutes of the Fed's most recent meeting showed policymakers worried about the possibilities of setbacks to the recovery and of inflation falling from low levels.
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