US Fed officials warn on bubbles

09:04, April 08, 2010      

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Two top Federal Reserve officials warned about the risks to the American economy from asset bubbles Wednesday, and one even suggested raising interest rates to halt risky behavior that could trigger another bust.

But Fed Chairman Ben Bernanke offered a relatively downbeat view of the economy during a speech in Dallas, suggesting he was in no rush to tighten monetary policy.

Thomas Hoenig, president of the Kansas City Fed, reiterated his concern that the Fed's ultra-low interest rate policies could have unintended consequences.

"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 business group.

"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 U.S. central bank's promise to hold rates exceptionally low for an extended period.

Bernanke, for his part, said the U.S. economy still faces significant headwinds, including a housing sector that has yet to recover convincingly and an ailing employment market.

"We are far from being out of the woods," Bernanke said in a speech to the Dallas Regional Chamber of Commerce. "Many Americans are still grappling with unemployment or foreclosure, or both."

Hoenig said on Wednesday the Fed could raise rates to around 1.0 percent, which would keep borrowing costs at historically low levels while sending a signal that easy money policies put in place during the global financial crisis of 2008 are steadily being pulled back.

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