Former Kansas City Fed president Tom Hoenig, a one-time FOMC voting member, thinks the central bank is about to make a mistake.
In a recent interview with Adam Taggart, the veteran central banker laid out a warning. The Federal Reserve is likely to cut rates in December despite inflation still running at 3%.
"Chairman Jerome Powell is holding his cards very close to his chest. I think he's probably counting votes, not wanting to be on the losing side of the vote," Hoenig explains, thinking that the final vote could be 7-5, an unusual scenario. The path of least resistance points toward easing.
But here’s where Hoenig breaks from the consensus – he thinks it’s a terrible idea.
“The economy is doing reasonably well”—unemployment is hovering around 4.1%—so why ease now when the “inflation dragon” is still breathing fire," he asks, noting that inflation is still a full percentage above target.
Worse, Hoenig sees the narrative shifting. If the Fed pivots now, it risks normalizing 3% as the new acceptable baseline—a stealth abandonment of the 2% mandate without ever admitting it. Three percent inflation, compounded year after year, quietly erodes purchasing power for the bottom 80% of households without stock portfolios or real estate to hedge with.
Defusing The Debt Bomb
Then there’s the fiscal time bomb ticking in the background. The U.S. is running a $2 trillion annual deficit and has $38 trillion in outstanding debt, and Hoenig believes the country is moving toward a point where bond market liquidity becomes a new mandate.
"So, we have price stability mandate, maximum employment mandate, low long-term interest rates mandate, and now we have to make sure the Treasury market is liquid and functioning fully," he notes.
High interest rates risk a full-scale debt blow-up, so the Fed would be forced to print money to buy the debt and peg interest rates below what they otherwise would be.
Hoenig is skeptical of easy fixes. When asked whether tariff revenues could help pay down the debt, a talking point floated by some in Washington, Hoenig is blunt: the numbers don’t come close.
Current tariff income can’t even cover the annual deficit, let alone touch the principal. The only real solutions are to reduce mandatory spending, such as Social Security and Medicare, or to raise taxes significantly. “Neither of which Congress seems willing to do,” he explains.
A Radical Solution
That’s why Hoenig gives it better than even odds that quantitative easing will return. Not because it’s sound policy, but because it’s politically easier than hard choices. He traces the rot back to the Fed’s massive QE program in 2010, which “made it easy for politicians to spend without consequence” by pegging rates at zero for years.
His proposed remedy is radical. It would introduce statutory limits on the Fed's ability to create reserves—say, 2-4% annual growth tied to the real economy. The only narrow, temporary exceptions would be for genuine crises.
"If you could really limit reserve creation, you would, you would accomplish something maybe better than the gold standard. Assuming, and this is a big assumption, that you stuck with it," he concludes.
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