Former Kansas City Fed Pres. Hoenig: Don't think there's any case for cutting rates

Key Concepts

• Presidential authority over Fed officials
• Court of public opinion vs. legal proceedings
• PCE inflation
• Real interest rates
• Neutral interest rate
• Expansionary fiscal policy
• FOMC (Federal Open Market Committee)
• Political pressure on the Fed

Analysis of the Paula Dominquez Case

• The Central Question: Tom Hoenig believes the court should determine if the president has the authority to fire a Fed official and force her to step down. He emphasizes the importance of due process, stating that Paula Dominquez "deserves her day in court like anyone does."
• Uncertainty: Hoenig acknowledges the ambiguity surrounding the case, questioning whether it stems from a "clerical error or something else."
• Public Opinion vs. Legal Authority: The discussion touches on the influence of public opinion, noting that past Fed officials have resigned due to public pressure, regardless of the president's direct authority.
• Paula Dominquez's Defense: Hoenig acknowledges that Paula Dominquez has publicly defended herself, though he doesn't assess the sufficiency of her defense.
• Possible Outcomes: Hoenig outlines potential scenarios: Paula Dominquez might choose to resign under continued pressure, or the court's decision could determine her fate.

Data Analysis and Monetary Policy

• Conflicting Signals: Steve Liesman highlights conflicting signals from within the Fed, including the New York Fed president's positive data assessment, an analyst pointing out inflation above the 2% target while the Fed is considering cuts, and a Fed governor predicting a weakening labor market.
• Hoenig's Stance: Hoenig aligns with a data-driven approach, emphasizing the recent increase in PCE inflation and the current unemployment rate of 4.2%.
• Real Interest Rates: Hoenig calculates real interest rates (nominal interest rate minus inflation) to be approximately 1.5%, considering the current inflation rate of 3%. He argues that this level is "pretty close to neutral," challenging the Fed chairman's characterization of rates as "restrictive or mildly restrictive."
• Neutral Rate Debate: Hoenig suggests that the demand for capital and the size of the national debt might indicate a higher neutral interest rate than commonly perceived.
• Call for Patience: Hoenig advocates for a "wait and see" approach, arguing against signaling future rate cuts. He believes there is no justification for cutting rates in a rising inflation environment.
• Fiscal Policy Considerations: Hoenig points out that the recent budget reconciliation bill is expansionary and will add $2 trillion to the national debt, further undermining the case for easing monetary policy.
• Rejection of Preemptive Easing: Hoenig dismisses the argument for preemptively easing rates based on the "intuition that unemployment is going to go up."

Political Pressure and the Fed

• Potential Influence on Powell: Steve Liesman questions whether Chair Powell, after resisting for a long time, might be succumbing to political pressure if the Fed cuts rates.
• Internal Pressure: Hoenig suggests that Powell might be facing pressure from within the FOMC.
• Appearance of Political Influence: Hoenig acknowledges that a rate cut would create an "appearance issue" for Powell, suggesting that it would raise questions about the Fed's independence.

Conclusion

Tom Hoenig's analysis presents a cautious perspective on the current economic situation and the Fed's policy options. He emphasizes the importance of data-driven decision-making, highlighting the recent increase in inflation and the relatively neutral level of real interest rates. He argues against cutting rates in the current environment and raises concerns about the potential for political pressure to influence the Fed's decisions. He also stresses the need for due process in the Paula Dominquez case, advocating for the court to determine the extent of presidential authority over Fed officials.