Fed Official Calls for Higher Interest Rates

Watch CBS News Videos Online

Thomas Hoenig, president of the Kansas City Federal Reserve, called for a gradual hike in interest rates and the rate at which the Fed lends money to private banks in an interview with CBS News Correspondent Rebecca Jarvis. (Watch at left)

Hoenig is the only voting member of the Fed to call for increasing interest rates, Jarvis reports.

According to Bankrate.com, the average rate for money market and savings account last week is down to 0.83 percent, hurting people depending on the interest earned on this safest of investments, especially seniors, Jarvis reports. Three years ago, when interest rates were at 5.55 percent, $100,000 in a certificate of deposit could earn $5,550 a year. Today, the same CD earns only 1.55 percent, or $1,550, annually.

"It's important to realize that zero percent was a rate that was necessary during the crisis, and I think it served its purpose," said Hoenig. "But now we have to think beyond that to a little longer term, and there are adverse effects, I think, from zero being carried."

One of those effects include a new avenue for banks to increase their profits.

"A large bank, or bank, can access funds for near-zero percent and then, because of what the Federal Reserve's policy is providing, then turn around and loan that money back to the government by buying securities for three or four percentage points more," Hoenig said.

Meanwhile, Hoenig said, cellar interest rates discourage people from depositing their money in a savings account.

"With the zero percent interest rates, if I take a certain amount of my paycheck and put it in savings, I can get almost nothing for it, so why would I save?" Hoenig asked. "I might as well buy goods. The other thing that is happening is people do tend, under those circumstances, to buy assets, whether it's land or whether it's gold or whatever."

(Last month, CBS MoneyWatch.com Editor-at-Large Jill Schlesinger wrote that while investing in gold can provide security in an insecure climate, she cautioned that it's still a risky investment.)

Ideally, Hoenig would like interest rates to be around 3 percent or, depending on inflation, 4 percent.

"We need to move ourselves off of zero in a fairly deliberate time period ahead, not a year or two years from now but fairly immediately," Hoenig said.

Hoenig proposed increasing the rate from zero to 1 percent within three to six months. Depending on the status and whether investing actually improves, he would want to raise interest rates again to what he called "a more normal level."

"I'm not advocating for high interest rates," said Hoenig. "That's not something we want to see either. We want to get off of zero, let the markets begin to work, not guarantee a margin to the banks so that they're more interested in making loans to businesses and more willing to because it's where they can get a return."

[gig76]

On the other hand, raise interest rates and give employees decent salaries. Do Not ever allow Real Estate run this country, ever. It's worthless if indoor plumbing doesn't work, or cracks in swimming pools, or foundations are cracked. The home is a piece of junk, but still worth something to the banks and Wall Street. America has driven itself into poverty once more -- thanks alot George W and your cohorts of credit. Hope he and his friends find themselves in deepest debt and depression that they won't ever be able to recover. They need to be in deep money woes where they have to work at Sears again for minimum wage. According to King Solomon, George W Bush and his greedy cohorts don't deserve anything. Hopefully that is extremely true. America was ruined by the reign of George W Bush and his bunch of cowboys. America is impoverished. It's worthless thanks to Bush and his wild Republican cowboys.

[gig76]

Of course, go ahead and raise interest rates. This may help end banking and credit card debt as we know it today. We don't need banks anymore anyway. Cash is King, and debt is evil. Therefore banks and credit are evil state of being. Go ahead, do away banks we havr credit unions at our place of business.

[gig76]

Raising rates at this time would create massive bankruptcies and this loon from KCity knows this. Does he csre, no. He is for ruining American lives, and if the interest rate rise at this time, it will affect every American. On the other hand, raising interest rates will help with savings. Bush Jr., ruined future generations to have transfer of wealth and now this "jack" wants to ruin American families even further. He is a loon and an enemy of the state.

[tsigili]

Very bad idea.

[longtree-2009]

time for interest rates to go up across the board. time for banks and lending institutions to tighten the reins on loans including student loans. why doesn't anyone learn? the dot com bubble burst, the housing bubble burst. what do we all need to learn and get the message? does it have to take a complete, devastating, depression with everyone in bread lines?

[JayAdlerMusic]

This stock market for me has not had underpinnings for some time. It is not a raging bull market as we all made hay during the Reagan years. One theory is that companies are slimming down so much that their bottom line looks better. Earnings and Interest rates are causing uncertainty and these are market drivers. Of course consumer sentiment, unemployment and global threats have to hit the market at some point if they continue. We have seen one 401K hit and another one will be really bad for the baby boomers although they may be in cash by now.The market does not like uncertainty nor does it relish people going into cash in unison.

[JayAdlerMusic]

I am only going to tell you my strategy as a small investor and please, I have no license to advise you and you should consult your licensed professional for any contemplated investment, once you are out of the savings there is risk to your principle. I think this article is right on. Interest rates are at the bottom and and what goes down must go up. The administration is spending money like a sailor on leave and the deficit is ballooning to infinity. This means inflation which does not only mean rising rates is not definite but probable, maybe in a big way. In the past month I have quietly bought a tax free bond fund and a taxable bond fund. This is called an interest rate play. I am getting current yields of 3.4 and 5% which is amazing current income. The principle is at risk but only on paper because there is an inverse proportion between interest and principle. What will eventually happen as I continue to invest in these funds, my goal to increase the income coming into my house will be accomplished exponentially as rates rise in my opinion. I will have an extra paycheck in the family but remember I may not be able to cash the whole thing in ever or for many years, it is a vehicle. Additionally I have sold all my stock except for FLR and GE. Do the math.

[roach9703]

Good Strategy, but don't forget well managed equities.