Hoenig Sees Fed Forced to Raise Rates, Buy Bonds as U.S. Debt Keeps Rising

Former FDIC Chair Says Fed Can't Be Market Maker for U.S. Treasury

Tom Hoenig does not shy from taking controversial positions that fly in the face of the majority’s views.

When he was president of the Kansas City Fed, in 2010 he dissented at all eight meetings of the Federal Open Market Committee, the central bank's main policy-making body. This because his analysis suggested that keeping interest rates near zero was no longer needed as the economy showed signs of improving and risked creating destabilizing fiscal and inflationary forces.

He rocked the banking industry’s boat when as the No. 2 leader of the Federal Deposit Insurance Corp. board he warned policymakers not to ease capital standards on large banks as they move to enact regulatory relief measures.

Tom joined me at the Hoover Institution at Stanford University as the Shadow Open Market Committee celebrated is 50th anniversary to discuss what he sees as the most important and even dangerous challenge for the Fed.

Now he is calling for the Fed to stop being a “market maker” for the U.S. Treasury by being ready to buy all as many bonds it issues.

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Tom says the Fed is not stepping up to a growing future problem: the growing debt that is inevitably coming at the Fed and “will put more pressure on it because otherwise interest rates have to go up.”

”You know the Federal Reserve is supposed to be independent of the Treasury, supposed to be able to say no when it gets carried away with the amount of spending that Congress does, and the amount of debt that then holds…should be saying slow down,” he says.

Tom says in the longer run, this will lead to inflation, “which is what we've done here recently…so we should learn from that but we haven't because Congress continues to increase its spending, increase its debt, and the Federal Reserve is going to be soon under more and more pressure to buy that debt or otherwise interest rates to go up.”

Want to hear more about this not so pretty picture? From someone who has held top positions as top policy maker who is not afraid to call it as he sees it? Dive in and hear more of what Tom has to say.

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Thomas Hoenig is a Distinguished Senior Fellow at the Mercatus Center at George Mason University. Mr. Hoenig engages in research and comment on economics, money and banking, and related policy topics and provides economic outlook and related services to investment firms and businesses across the country.

Prior to joining the Mercatus Center, Mr. Hoenig served as Vice Chairman of the Federal Deposit Insurance Corporation from 2012 until 2018. In that capacity, he oversaw FDIC operations and policy related to deposit insurance pricing, bank supervision, and financial stability and bank resolution. He served as Chair of the FDIC’s Bank Appeals and Audit Committees, and served as Director of NeighborWorks America, which was established by Congress in 1978 to address housing issues nationwide. He also served as a member of the International Association of Deposit Insurers’ board from 2012 to 2017, and as the President and Chairman from October 2015 to October 2017.

Previously, Mr. Hoenig was President and Chief Executive Officer of the Federal Reserve Bank of Kansas City and a member of the Federal Reserve System's Federal Open Market Committee from 1991 to 2011. Mr. Hoenig was with the Federal Reserve for 38 years, beginning as an economist and then as a senior officer in banking supervision. As President and Chief Executive Officer, he led the Federal Reserve Bank of Kansas City during the Great Recession and the banking crisis of 2008 and 2009.

During his time with the Federal Reserve, Mr. Hoenig chaired several key committees including the Conference of Presidents, the Committee on Bank Supervision, Regulation and Legislation, and the Information Technology Oversight Committee. Also, during his tenure, Mr. Hoenig organized and hosted the Federal Reserve Bank of Kansas City’s Jackson Hole economic symposium for global central bankers.

Kathleen Hays Presents: Central Bank Central
Kathleen Hays Presents: Central Bank Central Podcast
Timely, in depth analysis of Federal Reserve policy and players, and of its central bank counterparts around the world that are driving global markets.