One On One with Kansas City Fed President Tom Hoenig (VIDEO & Transcript)

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SUSIE GHARIB: Job losses continue to mount. The Labor Department said today American businesses cut 20,000 jobs in January. It's discouraging Tom.

TOM HUDSON: It was Susie, but there was some improvement in these numbers. The unemployment rate for instance dipped below 10 percent, now standing at 9.7 percent. We're going to have more on those jobs numbers a little bit later.

GHARIB: Tom, employment is a key factor watched by the Fed. So when I sat down for an exclusive interview with Tom Hoenig, president of the Kansas City Federal Reserve Bank, we talked jobs and a wide range of other topics. Hoenig's the lone Fed official who voted last week against keeping interest rates at zero for an extended period. Tonight for the first time, he explains why. I began by asking him when we'll see job growth in a big way.

THOMAS HOENIG, PRES., FED RESERVE BANK OF KANSAS CITY: I think our job growth will be modest, but consistently inproving over the course of this year. We had a very serious shock to the system. It has impacted confidence and I think rebuilding that confidence will take a little time and remember, job growth usually does lag the recovery. So in the sense that we have a -- a relatively systemic but modest recovery -- and I'm saying 3.25 percent in 2010 -- we will have improvements in jobs, but I don't see a big bang as you're describing it in terms of job growth, but I am seeing consistent job growth and that's important.

GHARIB: You've said that you're optimistic about the economy.

HOENIG: Uh-huh.

GHARIB: Is that optimism the reason that you are the only one at the last Fed meeting who objected to keeping interest rates low for quote, an extended period?

HOENIG: My view was that we should change the language. I didn't object on the fact that interest rates were low at this time, but I think policymakers need to have the broadest options possible and the language that we use, that is very low for an extended period, was appropriate during the height of the crisis to assure that we were not going to make any changes, but now the economy is beginning to recover. It has been in recovery now for two quarters. We have to be thinking a little bit longer ahead and that's really what my admonition was.

GHARIB: So do you think that the Fed should begin signaling that it's getting ready to raise interest rates?

HOENIG: No. What I'm saying is that the language should be changed so that we're not tying ourselves to language that says we won't do anything for an extended period when in fact events are changing, the economy is strengthening. I think those are -- those are really what I'm trying to say is, maximize your options as a policymaker. Remember, Susie, we're at zero now and I don't think that we can be at zero for an indefinite period. Remember, we want to get back to a more normal environment in the economy and with interest rates.

GHARIB: Well, if not zero, where should rates be? What is normal?

HOENIG: Well, in the long run, of course, I've said in public speeches, you need to have the policy rate at least higher than 3 percent, but now remember, that's a long time ahead. I said 3.5 to 4.5 in a very long period. So that's quarters or maybe even years ahead depending on how the economy recovery goes, but that's not something -- I don't want anyone to take away from this discussion that I think that should be the rate tomorrow.

GHARIB: So what is your timetable for raising rates?

HOENIG: It depends on the economy. It depends on whether the economy grows more quickly than I'm anticipating or less quickly and that you judge over time.

GHARIB: Tom, recently the president of the New York Fed Dave Dudley told me that at least six months when we were talking about beginning to raise interest rates. Do you agree with that?

HOENIG: I think that's fine that President Dudley made that comment. My point is watch the data. Make your judgment based on information as it comes in, whether it's six months, three months, a year, it will depend on new information. You can't -- you cannot predict the future with certainty.

GHARIB: What data are you watching? What's the most important data?

HOENIG: I'm watching very carefully the industrial production numbers as they come out. I think today's employment numbers were important information. And we will watch that each month as we proceed and a broad base of economic data.

GHARIB: As you suggest that the circumstances have changed in the economy and it's beginning -- that it's important for the Fed to make note of that, you know, a lot of people are so concerned that talking about any increase in interest rates at a time that with today's news for example that 8.5 million people lost jobs in this recession. What is it that you're seeing that others are not?

HOENIG: Well, I don't know that I'm seeing anything different, but I think I'm trying to maximize the ability to assure that the recovery continues and assure that we don't end up with a new bubble down the line or inflation two or three or four years from now. Remember, interest rates were very low in 2001, 2002 and the effects of that really came much later. And that's what we have to keep in mind for the future.

GHARIB: So are you concerned that the Fed could make the same policy mistakes that it made in the past because interest rates were kept too low for too long?

HOENIG: Well, I am concerned that we not leave interest rates too low for too long. That's my message at this point. People will argue about the past, but I am -- I am sure that a zero interest rate is not a sustainable interest rate without having undesired consequences. And I want to be able to make those changes when -- when the time is right.

GHARIB: Let's talk a little bit about mortgage rates. There are concerns that once the Fed stops its emergency lending program, that mortgage rates are going to shoot up. Do you see that happening?

HOENIG: I don't necessarily see that happening. I don't know what -- you know, that's a market, markets will help determine that, but I think there is a fair amount of liquidity out there. I think the market has the ability and I think it probably will, since markets work pretty effectively over a longer period of time, to provide the necessary funding for housing. It certainly has in our history.

GHARIB: But let's say that mortgage rates do rise significantly. Would you be in favor of the Fed stepping back in and supporting the mortgage market?

HOENIG: I'm not willing to assume that mortgage rates are going to rise significantly and that we have to step in. Remember we stepped in because it was a crisis and the markets had frozen. And I don't see that emerging again. So I'm not -- I'm not really wanting to think of that as - - as a likely outcome. We are on the mend. The markets can work. The markets will provide credit in the -- in the mortgage market and other industries, which are every bit as important for the long run health of the economy. And we have to allow that to occur and to take place. And that's the healthiest outcome for the U.S. economy over the long haul.