MNI INTERVIEW: Fed Will Hold For Long, Could Hike More– Hoenig

The Federal Reserve needs to hold peak interest rates for a prolonged time and might hike a bit further to ensure inflation returns to its 2% target, former Kansas City Fed President Thomas Hoenig told MNI.

Policymakers lack confidence they have done enough to anchor price expectations after two years of elevated inflation, even following substantial action and a restrictive stance, he said.

Chair Jerome Powell “made clear that the game isn’t over, there’s still a lot of risk in the economy for inflation,” said Hoenig at the Kansas Fed’s Jackson Hole Symposium that he used to host.

“I wouldn’t be surprised by another quarter point increase," he said. "If the September inflation numbers come out stronger than we expect, which is possible, then I think you could possibly see more increases and then hold for a while as this thing works through.”

POTENTIAL HIGHER NEUTRAL RATE

Robust fiscal policy since the pandemic is another complication, Hoenig said, supporting consumer and business spending and taking growth above expectations. Investor worries the economy may also be entering a higher inflation regime helps explain the rise in 10-year Treasury yields to the highest since just before the 2008 global financial crisis, he said.

“There is a very real possibility that the neutral rate is higher, for a whole host of reasons, not the least of which is a very significant debt carry that has to be reckoned with. The second part is the market is beginning to realize the Fed is going to keep rates higher for longer.”

Monetary policy lags mean interest rates are already restrictive, but there’s more tightening coming including through the Fed's balance sheet to prevent embedded inflation, he said.

“I’m pretty comfortable with where they are in the sense that at 5.5%, that’s I think above neutral, so that is restrictive," he said. "People are not watching as closely as they might the quantitative tightening aspect of this which also is tightening. So there’s a lot of constraint in the economy that should play out – that’ll take a little bit of time,” he said.

PHANTOM SOFT LANDING

The soft landing sought by Powell is not likely if history is any guide and Hoenig argued it’s premature to see recent strong growth and jobs data as proof that the worst is over.

“The soft landing has been around for decades, it’s kind of like a phantom that you keep looking for but never materializes,” he said.

“You don’t have to kill the economy to get inflation down but you also can’t ease up too soon because then you repeat the 70s and the Fed knows that as well as anyone who lived through that period. They are being cautious because they don’t know for sure that inflation is coming down.”

Workers also still have the upper hand in a tight labor market and are eager to make up lost ground from the inflationary hit to their wages. “I don’t think inflation expectations are anchored and that’s what I think the chairman realizes. I think they’re at risk of losing their credibility,” he said.