MNI INTERVIEW: Fed Could Cut Rates As Early As March-Hoenig

The Federal Reserve could cut interest rates in the next few months if inflation continues to fall, former Kansas City Fed President Thomas Hoenig told MNI, adding that the central bank’s pivot is premature and risks undermining progress in reducing price pressures.

“If inflation comes down, March is not out of the realm of possibility at all. If it doesn’t come down further they may postpone it,” Hoenig said in an interview. Chair Powell not only refrained from pushing back against dovish market expectations this week but if anything embraced them, implying that the Fed may not be cautious in the way it reduces borrowing costs despite recent high inflation, he said.

“I might have believed that if they’d had a stronger pushback at this meeting,” Hoenig said. (See MNI INTERVIEW: Five Fed Cuts In 2024 Are 'Plausible'-Wilcox)

SETTING EXPECTATIONS

“They’ve set that expectation, and one thing they don’t like to do is upset expectations.”

Markets rushed to price in six rate cuts for 2024 after the overwhelmingly dovish message from the Fed’s forecasts as well as Chair Powell’s remarks at the press conference, in which he said he’s all too cognizant of the risk of waiting too long to reduce rates.

The central bank is “anxious” to reverse course on monetary policy after an aggressive tightening cycle that saw rates rise 525 basis points, because it worries that waiting too long will push the economy needlessly into recession, Hoenig said. “What they’re doing is confirming their shift from 2% as the goal to 2% and no recession as the goal – that broadens the scope of the goal,” he said.

Yet Hoenig worries the FOMC's change of tune, which led to risk rallies in financial markets around the world, is a risky gambit that could threaten some of the improvement seen on inflation.

“If they had CPI inflation down to 2.5% and shown continuous declines, I would have agreed with that. But inflation has been 3% for months, core inflation has been 4% or higher for three months,” he said.

CPI rose 3.1% in the year to November while core prices were up 4.0%, the Labor Department reported this week.

LAST MILE

“The last mile of getting inflation down to 2% is a long one,” Hoenig said, noting that house prices have continued to rise despite the sharp increase in rates and that wages could be sticky following union negotiations that led to substantial gains for workers. “Policy really hasn’t tightened since May. Wages stopped coming down in August.”

Hoenig is still skeptical of a soft landing that looks too good to be true.

“From the time the Fed stopped raising rates in 2006 – it was two years until Lehman,” he said. (See MNI INTERVIEW: U.S. Demand Still Too Hot For Soft Landing)

Fed officials will also have to cut short plans to reduce the balance sheet at some point this year because the budget deficit is getting too large for the central bank to continue withdrawing bonds from the market at a rapid clip, Hoenig said.

“Watching the reverse repo balances tells you (the timing). When those go away somebody has to fund the debt,” he said.