Fed bank chief calls for interest rate hikes ‘by the end of summer’

Thomas Hoenig, the head of the Federal Reserve Bank of Kansas City, is cementing his reputation as the best friend of savers with money in the bank.

Hoenig, who has a seat on the Fed’s interest-rate committee, on Thursday called for the central bank to raise its benchmark short-term rate to 1% “by the end of summer,” from its current range of zero to 0.25%.

Hoenig has been agitating all year for the Fed to begin boosting interest rates, arguing that the economic recovery was sustainable and that the central bank risked setting the scene for high inflation if it kept rates too low for too long. Any rate increase would help savers who are earning next to nothing on bank deposits.

But Hoenig is a lonely voice on the Fed committee: He has been the only dissenter at the three Fed meetings so far this year, as the rest of the committee has gone along with Chairman Ben S. Bernanke’s policy of maintaining rock-bottom rates “for an extended period.”

In his speech Thursday in Bartlesville, Okla., Hoenig said the Fed should move toward “normalization” of policy by first removing the “extended period” commitment to near-zero rates and then should “be prepared to raise” the central bank’s benchmark rate to 1% by the end of summer.

“We would then pause … while we assess the economic outlook and emerging financial conditions,” Hoenig said.

The Fed has three summer meetings scheduled: June 23, Aug. 10 and Sept. 21.

But the chances of the rest of the Fed committee going along with Hoenig seem slim to none at this point — barring a rip-roaring U.S. economy this summer and a fast end to Europe’s debt crisis.

Dennis Lockhart, who heads the Fed’s Atlanta bank, said in a speech Thursday in Atlanta that although “the time is approaching when it will be appropriate to consider recalibrating interest rate policy, I do not believe that time has yet arrived.”

Trading of futures contracts pegged to Fed moves suggests Wall Street sees a 73% probability that the central bank will still be holding its key rate in the zero-to-0.25% range at the Sept. 21 meeting.

If so, count on a 100% probability that Tom Hoenig will be dissenting.

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