Federal Reserve's Hoenig cautions of mixed signals

TULSA -- The U.S. economy is "uniformly" strong with healthy growth combined with low inflation, Kansas City Federal Reserve Bank President Thomas Hoenig said Monday.

In a speech to The State Chamber in Tulsa, Hoenig warned however that he saw "mixed signals" on inflation.

One warning sign is the unemployment rate, which is now below 5 percent, suggesting the economy is running short of available labor. "Employment is still very strong in spite of showing some signs of slowing in September," Hoenig said. Total economic growth is also running above the 2.5 percent rate that Fed officials have traditionally said is about the top rate of growth that won't bring accelerated inflation. That strong growth should continue, he said, because consumer confidence and manufacturing remain strong. Still, he said, it was not "automatic" that a tight labor market would push wages higher, providing that production capacity expands. Spare manufacturing capacity is dwindling, he said, although it was not yet at "break out level." Hoenig is a voting member of the U.S. central bank's Federal Open Market Committee, which sets interest rate policy. The FOMC, which meets next on Nov. 12, has left the overnight lending rate at 5.5 percent since March. According to a report in The Wall Street Journal today, the Federal Reserve is likely to keep its target overnight bank lending rate steady next month. The report cited conversations with Fed officials. Hoenig made no comment about that article in his remarks, and he declined to discuss the drop in U.S. stock markets Monday. Last week, Hoenig said the U.S. economy remains on a path of strong growth with "modest inflation," though it's unclear how long that can continue. "The economy continues to enjoy successful growth in an environment of modest inflation," Hoenig said then at a luncheon sponsored by brokerage firm George K. Baum. "People are beginning to ask whether inflation may not be lurking behind this." Still, he said there are some indicators, such as strong growth in employment, that could push prices higher. His comments echoed a string of remarks from Fed policymakers, among them Federal Reserve Bank of Richmond President Alfred Broaddus and Federal Reserve Bank of Chicago President Michael Moskow, warning that low U.S. unemployment could force companies to raise wages and salaries to attract qualified workers. Fed Chairman Alan Greenspan issued a similar warning earlier this month, sending stocks and bonds plunging. Higher wages mean stronger consumer demand for goods and services, which can lead to inflation. Still, the overall tone of comments from policymakers last week suggest rates will remain on hold, so long as the pace of job creation slows.

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