Raise rates as quickly as possible - Fed's Hoenig

By Alister Bull

KANSAS CITY, Mo. (Reuters) - The Federal Reserve should raise interest rates toward their "neutral" setting as quickly as reasonably possible to prevent high inflation taking root, a top Fed policy-maker said on Wednesday.

"To the extent that the economy as we watch it ... avoids recession, and to the extent that you watch commodities, you do want as quickly as possible to get back to neutral," said Federal Reserve Bank of Kansas City President Thomas Hoenig.

"If you can do that, the implications for the long run are much more favorable in terms of inflation expectations and how it gets embedded into the economy," he said in an interview.

The "neutral" level of interest rates is the point where monetary policy neither helps nor hinders growth. It is hard to pinpoint, but is above the Fed's current rate-setting of 2 percent, which Hoenig said was stimulating the economy.

"Two percent is accommodative; 2-1/2 percent is accommodative. So there is room to move back toward neutral without becoming tight, and without being neutral," he said.

"The goal is to get to neutral without tanking the economy. I think that it is important that we do that as reasonably soon as we can," he said, speaking in his 14th floor corner office of the bank's imposing new headquarters, about 1-1/2 miles from downtown Kansas City.

However, he does not anticipate a speedy return to strong U.S. growth. The economy will be subdued this year and into 2009, and Hoenig said it might be 2010 before it achieved trend-like levels around 2.5 percent.

Hoenig, a former bank supervisor who keeps a pair of binoculars handy to monitor financial institutions in the city's skyscrapers, has been president of the Kansas City Fed since October 1991. That makes him among the longest serving members of the Fed's rate-setting committee, although he is not a voter this year.