MNI INTERVIEW: Inflation Too High For Fed Rate Cuts - Hoenig

The Federal Reserve’s rush to cut interest rates next month looks premature given still-elevated inflation rates and an economic and employment picture that is largely stable, former Kansas City Fed President Thomas Hoenig told MNI. 

The FOMC "should not be cutting given the stability in the economy generally – unemployment very stable, inflation well above the 2% target and well above price stability – and that’s both PCE and CPI,” Hoenig said in an interview Thursday. 

“This is a steady state. Real interest rates are pretty close to neutral. I think you are risking a less stable market if you lower rates.”

Coupled with threats to Fed independence, that volatility could manifest itself in the form of higher longer-run borrowing costs even if the Fed does push short-term rates down, as the White House has relentlessly pressured the central bank to do.   

“They want to lower interest rates so you can lower mortgage rates. But the effect would be, I think, to increase the demand for housing, increase the demand for capital. To do that, I don't know that would bring interest rates down especially in the long end. We saw what happened a year ago,” said Hoenig, now a senior fellow at the Mercatus Center.

DEFICIT INFLATION

Hoenig said there will be additional inflation from tariffs, which he would have been willing to look through as a policymaker. However, he’s worried about a ballooning budget deficit accentuated by the latest tax cut legislation. 

“To me the real issue is the government is spending USD7 trillion and taking in revenues of USD5 trillion. So there's a new USD2 trillion of debt added, and that tends to be inflationary, especially around the subsidies and the tax cuts and so forth,” he said.  

Savings from cuts to Medicaid and increased tariff revenues pale in comparison with the extent of the budget hole, he said. 

“So you've got an expansionary fiscal policy in place right now that's going to have more effect on inflation than the tariffs longer term.”

FED INDEPENDENCE

Like many others in the central banking community, Hoenig is concerned about threats to Fed independence given unprecedented public attacks on the institutions from President Donald Trump. 

Trump will get to appoint Fed Chair Jerome Powell’s replacement next year and has already nominated Council of Economic Advisors Chair Stephen Miran as his first second-term appointee to the Fed Board of Governors. 

“If you get a majority of the Board listening to Trump as a policymaker, then you really do have an issue with inflationary expectations becoming unbound and uncertainty rising. That would have a major effect on the bond market,” Hoenig said.

He said there’s a “high probability” the administration will try to control not only the Board but the regional Fed banks as well, by using board members’ veto powers on the reappointment of Fed presidents early next year. 

“The board of directors of Fed banks will probably put their names in, but the Board of Governors can reject that,” he said.