KC Fed Chief: Higher Interest Rates May Be on Horizon

July 25, 2011 05:12 AM

Congress is unlikely to make the hard choices on deficit reduction, and the result? The potential of higher interest rates. That’s the prediction of Thomas Hoenig, president and CEO, Federal Reserve Bank of Kansas City. He spoke at the "Recognizing Risk in Global Agriculture" meeting last week, sponsored by the KC Fed.

He says that Congress is not likely to make the hard choices of deficit reduction because everyone has something to lose, and no one wants to be responsible for lost jobs. He predicts that the U.S. economy will grow at a rate of 2.5% to 3% for at least the next year. Hoenig adds that 15 years ago, the U.S. made a decision to become a consuming-driven economy, and consumer spending continues to drive the economy today.

Hoenig adds that debt is not just a federal issue, as "debt is pretty significant at a state (government) level." He is very concerned about the future, as debt is such a huge piece of GDP. "The reason we can’t get out of debt: Social security, Medicare," and many other programs. As a result, he looks for the government to embrace inflation as the way out. "Real interest rates will rise" as a result, he says. That’s the situation the nation gets into when policymakers fail to make tough choices, he says.

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