Former Federal Reserve insider Thomas Hoenig thinks the U.S. faces a painful reckoning because of high inflation.
Hoenig was a lone dissenter eight times in 2010, when the Fed voted to pursue a then-novel strategy, known as quantative easing, of buying trillions of dollars in Treasury and mortgage-backed bonds. The goal was to flood the U.S. with money and slash interest rates in an effort to juice up the economy.Then and now, Hoenig warned the policy could lead to more harm than good. Recently his warnings have gotten more attention.
On the economy … “It’s going to be a very difficult couple of years for the U.S. economy and the Federal Reserve. If they raise rates to bring inflation down, then the hard part begins. Because when that happens and the economy begins to slow, they’ll worry about recession. There’ll be a likelihood they ease policy again even while inflation remains four to five percent.”On the cost of inflation … “People are if nothing else sensitive to high inflation. They know what it is doing to them.
On Fed’s balance sheet … “I think they will be very slow in shrinking their [$9 trillion] balance sheet. It would affect the housing market because they buy a lot of mortgage-backed securities … they don’t want to do it too quickly … we’re probably talking about a decade to get the balance sheet back to any kind of balance. The thing is, it won’t come without pain.”
On rich getting richer … “If you own an asset, you win just from the inflationary effect … Usually it’s the upper middle [income] and wealthy who are in that position … If you’re a wage earner you’re going to fall behind … you have to borrow more or commit more of your income to housing.”
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