MNI: Weaker Growth To Damp Fed’s Hawkish Resolve-Ex -Officials


Softening economic growth and higher unemployment later this year could shock the Federal Reserve into slowing or pausing an aggressive string of rate hikes expected in coming meetings, former U.S. central bank officials told MNI.

Fed officials who were only recently signaling a quarter-point rate hike at every other meeting now appear to be aiming to frontload multiple 50-basis-point increases before reassessing the situation, with ex-officials noting that the rapid hawkish shift has generated a tightening of financial conditions that is already starting to be felt.

“I just wonder if at the first sign of trouble they won’t panic,” said Thomas Hoenig, former president of the Kansas City Fed. “If the unemployment rate starts to rise I think they’ll get cold feet. Everyone is complaining about inflation right now but believe me when the unemployment rate starts to rise, the pressure on the Fed to back away will be enormous.”

At the same time as U.S. monetary policy plays catch-up, the war in Ukraine and Covid lockdowns in China are raising concerns about global growth prospects, casting doubt on the Fed’s most recent forecast of 4% U.S. GDP growth this year.

“This highly uncertain and unusual situation in which you have both war in Ukraine and Covid interacting and reacting is not something you can get out of textbooks or models,” said Donald Kohn, ex-Federal Reserve Vice Chair. “So you would want to gauge to some extent how the economy is responding as you raise rates.”


Ex-officials noted monetary policy works with a lag and it could several months or longer to see not just the economic fallout but also the potential financial pain inflicted from the Fed’s unusually fast policy pivot.

“It’s not just the level it’s the rate of change, and the rate of change going from basically zero to 25 basis points to 225 to 250 basis points is a huge increase, and the economy has to adjust to that. It will be a rough ride I suspect,” said Hoenig, also former vice chair of the Federal Deposit Insurance Corporation.

“If you have a fixed income portfolio your tangible capital is under pressure already. So I don’t think there’s much room for error.”

Hoenig said if the unemployment rate, now near historic lows at 3.6% starts to climb back toward 4-½% or 5%, the Fed will come under a lot of pressure to back off from its tightening plans.

“They’ll be more inclined to move those so-called aggressive moves down to less aggressive moves sooner than people realize,” he said.


The Fed has acknowledged it missed the inflation surge that has gripped the U.S. and other wealthy economies in the last year, with the consumer price index surging 8.5% in the year to March, a 40-year high.

Now, following its hawkish shift of recent weeks, recession fears have started to permeate financial markets, in part because the Fed’s newly aggressive stance is seen as a reaction to falling behind the curve that increases the chances of a policy mistake. (See: MNI: Fed Seen Taking Swift Steps To Neutral Rates By Summer)

“It could well take a bit of a low trend growth and higher unemployment rate to dampen demand,” said Kohn. “It’s kind of a narrow path they’re walking but not impossible to get to the other side.”

Rick Roberts, a former New York Fed staffer as well as a former policy advisor to the Kansas City Fed, thinks the central bank is inclined to flinch as the economic going gets tougher.

“The Fed's tightening bravado will eventually subside, and the central bank will realize that they must not drop the punch bowl that they have been late to remove from the accommodation party,” Roberts told MNI.

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