Fed official worries low rates will cause bubble

Keeping interest rates low for a long time can create ripe conditions for dangerous asset price bubbles, a Federal Reserve official said in a Wall Street Journal interview published on Saturday.

Thomas Hoenig, president of the Kansas City Federal Reserve Bank, said it was "understandable" that the U.S. central bank cut interest rates to near zero during the financial crisis, but it was time to at least start reconsidering that stance.

"We've gotten through the crisis," he said. "We are not out of the woods, the economy isn't booming, but we are now in a position where we ought to be thinking about the long run. That's what central banks should do."

Hoenig has dissented at the past three meetings of the Fed's policy-setting committee because he is uncomfortable with the central bank's pledge to keep rates ultra-low for "an extended period" of time.

He said keeping rates near zero gave Wall Street banks an advantage over Main Street because financial firms could borrow at low rates and lend or invest for bigger returns.

"I can't guarantee the carpenter down the street a margin. I really don't think we should be guaranteeing Wall Street a margin by guaranteeing them a zero or near zero interest rate environment," he said.

The Fed has said that its low-rate pledge will stand as long as the economy is weak, unemployment high, and inflation low. But Hoenig said monetary policy "has to be about more than just targeting inflation.

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"It is a more powerful tool than that."

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He also said Greece's debt crisis was a lesson for the United States, which has its own massive debt pile that could eventually drive up interest rates if creditors grow uncomfortable with cheaply financing large deficits.

"We shouldn't be so, if I may say, arrogant to think that that couldn't happen to us or others," he said. "We're fortunate, we're a much bigger economy and we're the reserve currency."

He said U.S. deficits were not sustainable, and there could be pressure on the Fed to print money to pay off debts. If that happens, "the outcome of that will be a very strong inflationary bias," Hoenig said.