Central Banks

Friday, January 24, 2020 - 10:45

MNI INTERVIEW: Hoenig: Fed's Easy Money Trap Adds Market Risk

--Ex-Kansas Fed President Sees Steady Rates This Year

WASHINGTON (MNI) - The Federal Reserve won't be able to reverse ultra-easy monetary policies for at least a decade, adding risk to the financial system, former Kansas City Fed President Thomas Hoenig told MNI.

The Fed is getting stuck in a world of ample bank reserves and extensive bond purchases in a financial system already characterized by excess leverage, Hoenig said in an interview. Hoenig also saw little chance the Fed will move its policy rate this year.

"Now QE is the policy tool -- they're trapped and I don't see how they're getting out of it anytime soon," he said. "It will take at least a decade if not more" to reverse those policies, he said.

The Fed halted efforts to reduce its balance sheet in September after a repo market squeeze and switched to an ample reserves policy. The balance sheet has expanded nearly half a trillion dollars in the last few months and equity prices have soared to new highs. Investors have questioned whether the policy is an indirect form of QE and the Fed has laid out no clear plan to move out of the the kind of "trap" Hoenig is worried about.

"The dust-up with the repo market kind of demonstrated that," policy dilemma, Hoenig said.


The Fed's balance sheet is USD4.2 trillion compared with less than USD1 trillion before the last downturn. Some Fed officials have argued the economy's growth over the last decade justifies much of the growth in the balance sheet.

Hoenig, also former vice chair of the Federal Deposit Insurance Corporation, said the Fed may have made an earlier policy miscalculation by underestimating the tightening impact of a shrinking balance sheet and higher official borrowing costs.

Forced to reverse course and cut rates three times last year, the Fed now intends to stand pat if at all possible, a path Hoenig views as wise.

"They certainly should try to keep rates where they are for now," he said. "I wouldn't lower them, if they saw a temporary slowdown. If the economy slows too much they will initiate further quantitative easing."

The bar for a resumption of interest rate hikes is even higher, Hoenig said: "I don't think they're going to be raising them until or unless inflation really breaks out above the 3% to 3.5% mark."


Inflation is not showing up in consumer prices but Hoenig worries about asset price inflation. Higher stock and bond prices pose a danger to financial stability and can boost inequality since those gains flow mostly to the wealthy.

Another reason the Fed may be stuck with easy money for a long time is because Hoenig said there will likely be little change from the Fed's framework review. Policymakers would have begun signaling any major changes to the Fed's 2% inflation target system well ahead of a possible mid-year announcement, he said.

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta.ext@marketnews.com
--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com


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