Thomas Hoenig was president of the Federal Reserve Bank of Kansas City from 1991 through 2011. I first met him in 1991 at the K.C. Fed’s annual symposium in Jackson Hole at a propitious moment when he was getting ready take over as president of the bank and I attended the annual event for the first time ever.
Tom by then had already been at the bank since 1973 beginning as an economist and then as a senior officer in banking supervision. As President and Chief Executive Officer, he went on to lead the K.C. Fed during the Great Recession and the banking crisis of 2008 and 2009.
(Speaking of banks, he went on to become Vice-chair of the Federal Deposit Insurance Corporation and now, as a Distinguished Senior Fellow at the Mercatus Center at George Mason University continues to write regularly about the latest banking and finance issues in the FinRegRag on Substack.)
It was in the post-Great Financial Crisis that he made his mark as a critic of the Federal Open Market Committee’s policy path. He argued that the Fed was keeping rates too low for too long and that doing so would make the economy vulnerable to future financial crisises.
All these years later the Fed is once again looking at the trade off between what many see as fighting inflation versus trying to keep the labor market on track. Chair Powell’s speech on the opening day of the symposium was seen as opening the door wide to a rate cut at the September meeting as a weaker than expected July jobs report suggested economy is slowing down, and as he said monetary policy is still restrictive. Once again, Tom is not convinced.
”We have a very strong fiscal program going on right now that will be very stimulative to the economy. And remember, inflation right now is 3% well above its target of 2%. So I don't think it should be an automatic okay rate-cut. And I think the world should know that and should take that seriously.”
So dive in and hear the math behind why Tom disagrees with those who say that restrictive Fed policy is a key argument for starting to cut rates again. Spoiler alert: in his view policy is not only not restrictive but in fact remains on the accommodative side.
Tom Hoenig-Why Jackson Hole is special 00:01:20:22
It's a global conference. And in these times, with all this going on in terms of uncertainty, it's probably more important than ever that we have this conference for people to talk, visit, understand one another and move forward.
Sideline topics- 00:01:51:01
Jay Powell’s speech is what are people talking about on the sidelines right now. Right. And, it's generally about everything. Well first of all there are two topics. One, everyone's talking about the speech. Jay Powell that the market has priced, you know, like 100% probability that there'll be a rate cut. I hope I hope that's being overstated. I think there's a lot more to that speech than just the rate cut. Because yes tariffs are going to have a role. They're going to raise the cost of goods. But that and that'll slow the economy, I agree with that. But I think more than that, some things were not covered enough.
The fiscal mess and its implication 00:02:40:
And that is we have a very strong fiscal program going on right now that will be very stimulative to the economy. And remember, inflation right now is 3% well above its target of 2%. So I don't think it should be an automatic okay rate-cut. And I think the world should know that and should think that seriously.
A different perspective on what is restrictive 00:02:59:09
The other part of it is that, if you look at where interest rates are, Jay Powell says that they are still restrictive, slightly, if not, totally restrictive. And I say, you know, with real interest rates today, with inflation at 3% and the nominal rate at 4.3, interest rates are 1.3% in that range. That's fairly accommodative. That's not a restrictive rate. at best it's neutral. It could be even accommodative. So why are we jumping to the conclusion the market wants it? If they do lower rates we saw it in today's market. That's up. Asset values are up. So we're going to raise the cost of housing even more. With lower interest rates prices will go up. And so there'll be long-term consequences. And that we need to think that through. So that's what I hope they take away from this.
Push back on AI- 00:03:43:12
The second one: there was some pretty important discussions on AI. And artificial intelligence and how it's going to take everybody's jobs away. Well, this was different because it said, no, it's not going to take these jobs away. It will improve productivity. Yes, it will improve how we do our jobs. It will create new jobs, and it will advance, I think society was a message. Health care, finance, all the things that I can help do. And I think that was a very positive okay going forward. So, it's one part of it. I was understood where the chairman's coming from. I'm hoping there's more debate around that. Second is, I think, very positive news on AI, which I think we all need.
Politicization of central banking 00:04:25:00
There's so much, there's so much politics. And the politicization of central banking is what things people are worried about. And certainly right now, because I've been thinking that one of the tough things here for the Fed…the Federal Open Market Committee, that is the policymaking body for the Fed.
Pressure on the Fed makes good policymaking harder to achieve 00:05:11:16
They're going to say, oh, he's all this pressure from Trump. Yeah. He caved. I took a risk. It is. Well, and I think, it's one of the dangers. That's one of the problems with having a president trying to get someone to do something. No matter what that person does… Everything is a big game. That's a risk that they're taking and it makes it more difficult for Powell to have a debate and come out with the committee as a whole and think he’s got the best outcome.
Markets are not begging for rate cuts 00:05:56:17
The (stock) market itself is pretty strong right now. The stock market I know it's had some adjustments going on, but the market is pretty strong. And then following that, you know, the manufacturers index was pretty strong this time. It was up. Confidence seems to be solid. Consumer spending, you know, they're saying it is stable and but I think it's stable on a pretty good level.
Tariffs…as a solution? 00:06:40:00
So the economy is really pretty decent. And yes, it probably will slow with tariffs, but that's part of the transition that's going on. And there's no free transitions in economics either. And I think that's needs to be kept. When you talk about the transition that's going on I'm glad you put that on the table. What are you talking about. The transition around tariffs in the economy. The with that, of course, I've said for a long time the United States has long consumed more than it's produced. That's not sustainable. So, he's moving forward raising tariffs.
What tariffs actually do 00:07:22:02
That's going to slow consumption. It's a tax. It's going to slow consumption. That's the price you pay in a sense for realigning the consumption with the production. And it's not it doesn't happen overnight. It's going to take time. And I think if you get the problem is if you say, well, it's fine. And, therefore, monetary policy has to make up the difference, you're in danger of reigniting inflation, which we know what happens then.
Coddling inflation is laying with fire 00:07:50:22
And in a sense, I know that Chairman Powell is very much aware of the 70s. And we will repeat that period where we allowed systematic inflation to rise by lowering rates when the things slowed and then raising them when inflation gets higher and then lowering them too soon until heat ratchets up. And you get an, an undesirable outcome of a slower economy and much more inflation, not just a transition, but a much stronger inflation.
Tariffs may be a solution…not just a problem- a hard idea to sell 00:08:19:13
in the world of conventional economics, there's been so little support for this. But I do get the sense that a lot of people are starting to change their mind about this, change their mind about what Trump has been doing.
Having said THAT I’m for free and open trade- 00:08:48:12
I'm for open trade, but based balanced trade. I mean where you both benefit from it; that's an issue. But the real thing to me relative to our consuming more than production producing, is the fact that we have run large national deficits. We have subsidized consumption in this country for decades. We have kept interest rates artificially low for decades- that produces greater consumption from Europe for us, from around the world, as we print this money and the rest of the world is willing to lend to us, in a sense, take our IOUs to produce those goods.
All this… and our fiscal house is not in order 00:09:27:07
Well, that's having the effect on the middle class in this country every bit as much as not having tariffs. So I think the fundamental problem is around our very strong, consistent domestic deficits and international trade deficits. Well then our is that big, beautiful bill. Not so beautiful to you. In that big beautiful bill for me is a very expensive expansionary program. There's lots of tax cuts with it. There's lots of subsidies. There's no real reduction in the debt. Spending goes on; there are just cuts in future increases…. But the spending itself is going to still be over $7 trillion. And we're only taking in $5 trillion in revenues. That's where the major problem lies in my opinion. Yes, they need to pay more attention to that. And I know there's Republicans who believe that and some Democrats who believe that. So it's it's a it's a big gaping wound that I think we need to address.
The New Framework…does NOT prioritize price stability 00:10:59:09
It's we're going back to the 2% target apparently and so forth. But the here’s the facts. And I said this… that is a strategy is there. It's an aspiration more than it is a real operating document. It's an aspiration. We want to do it this way. But the fact of the matter is this is a committee of individuals. This is a room, and the committee of individuals, it kind of takes for a moment and defines their policy around the moment. So right now, the moment is tariffs and slowdown. Will the moment be our national debt and our trade deficit? I don't know, but it's not a strategic plan that says we're going to take monetary policy and make sure we have stable prices. And with those stable prices comes maximum employment. I don't see that as the strategy.
The test of independence 00:13:21:05
Cut the rate. Then we will know that the breadth of independence because, there will be a lot of, a lot of screaming and yelling, among the administration and other supporters for a rate cut. That will be the test of independence. That's why I think it's such a hard, difficult decision for (the Fed).
Thomas Hoenig
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.
Mr. Hoenig is from Fort Madison, Iowa and received a doctorate in economics from Iowa State University.
