At the start of the year, markets anticipated the Federal Reserve would cut interest rates six times in 2024. Five months into the year, even a single interest rate cut is questionable as inflation stays stubbornly above 3%.
Minneapolis Federal Reserve Bank President Neel Kashkari said on May 7 the Fed may need to hold rates steady all year. In an interview with Straight Arrow News, former Kansas City Fed President Thomas Hoenig said even the current rate isn’t restrictive enough for the Fed’s target inflation rate.
“If the Fed really wants to bring their inflation numbers down to 2%, they’ve got to raise rates,” Hoenig said. “And they certainly can’t ease or cut rates at this point.”
Despite his prescription, Hoenig said the Fed does need to be careful about the “vulnerable” banking industry. He said the only case for lowering rates right now would be if there were a banking crisis, which would likely trigger a recession and force the Fed to ease rates.
Barring a banking crisis, Hoenig said a soft-landing scenario — where the Fed successfully brings down inflation without triggering a recession — is possible but very difficult considering the current economic conditions, which he called an “unstable equilibrium.”
“Either you’re going to have to raise rates to bring it down and risk a greater financial problem and recession or you’re going to have to let inflation run higher than your so-called target,” Hoenig said. “So it’s very hard to imagine a soft landing under these conditions. Maybe if enough time runs at the current level, things will align to a soft landing, but it is unlikely,” he said.
Hoenig said the Fed should never have brought up cutting rates at the turn of the year. While he said the Fed is looking at the right data, it’s not interpreting it correctly.
“If they have been looking at the data year on year … they would have known inflation was still running too high at 3% and they would have never started talking about cutting rates last January and December,” Hoenig said. “They looked at their most recent data, it looked like inflation was coming down. ‘By gosh, we’re going to cut rates.’”
“They said it too soon and that caused them, I think, greater problems and a more difficult time achieving their soft landing,” Hoenig added.