Fed Official Calls for Higher Interest Rates

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."