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JACKSON HOLE, Wyo. — The Federal Reserve has so far “been a little too quiet” about the Treasury Department’s campaign to bring down yields by buying back more long-term debt, former Kansas City Fed President Tom Hoenig told Semafor.
“What they’re trying to do is not identify with Treasury, and so they’re not going to mention it,” Hoenig, now with the Mercatus Center, said on the sidelines of the Kansas City Fed’s annual economic policy symposium he once hosted. Coordination between monetary and fiscal policymakers could heighten concerns over Fed independence as the Trump administration continues trying to exert control.
Treasury Secretary Scott Bessent, who did not attend the conference, said earlier this month the Treasury would double its purchases of government bonds. Some metrics show it’s having an impact. But the move risks clashing with Fed Chair Kevin Warsh’s own plans to shrink the Fed’s balance sheet — and with any Fed decision to tighten monetary policy.
On the latter, Warsh has “got a very difficult needle to thread” on whether to support an interest-rate hike next month, Hoenig said. If he does, “he’ll have to make sure he has a lot of explanations beforehand, a lot — and I don’t mean to the market, I mean to the Treasury and so forth, as to why, because this will cause some disturbance, even if inflation numbers are higher.”
Hoenig also urged Warsh to convince Congress to rein in spending “before we enter a crisis”; predicted that the president’s effort to oust Fed Gov. Lisa Cook is “not going to work”; and described the forward guidance spurned by Warsh as a “subsidy” for markets.
“Kevin is taking that away from them, and I’m very, very happy that he’s doing it,” Hoenig said. “They’re making plenty of money on their own; why should you subsidize that?”
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This transcript has been edited for length and clarity.
Eleanor Mueller: Do you think the hawkish rhetoric we saw Warsh espouse today will translate into him supporting a rate hike at next month’s meeting?
Tom Hoenig: “Not necessarily, no. If you listen to him carefully, he said we’re well above the target. But we’re looking at the data, seeing which way it’s trending, watching it carefully, and I would say if the data doesn’t change much between now and then, he probably won’t make a move. If it’s higher — if the labor market is strong, inflation actually moves up again — then he may be ready to move now. Now, to be honest, he’ll have to make sure he has a lot of explanations beforehand, a lot — and I don’t mean to the market, I mean to the Treasury and so forth, as to why, because this will cause some disturbance, even if inflation numbers are higher. So you have to be careful there. Regardless of what he does, if he does nothing, he will have to explain himself very carefully; if he does something; he’ll have to explain himself very carefully. In the first instance, because many people are expecting it, the market’s adjusted up, and it will hurt his credibility if he doesn’t explain himself well. The second instance, if they move, he will have to do it because there’ll be a lot of people accepting, I would say including the market. He’s got a very difficult needle to thread.”
Eleanor Mueller: Were you surprised that he made no mention of Treasury Secretary Scott Bessent’s efforts to buy back more long-term debt?
Tom Hoenig: “Not at all. In fact, I think the Fed has been a little too quiet about what the Treasury is doing. What they’re trying to do is not identify with Treasury, and so they’re not going to mention it. Conceivably, I guess they could at some point — but not unless they’re forced to, I would think.
“Now, my own preference is, as a central bank, I think they should be talking to the leadership, the Treasury, and the leadership of Congress about the fiscal deficit, the debt, and making it clear that it’s going to be harder for the Fed to do its job if they don’t start doing their job. And I think he’d be perfectly within his rights to do that.”
Eleanor Mueller: Do you suspect those conversations are happening behind the scenes?
Tom Hoenig: “I don’t know. I hope they are, but I don’t know. I have no idea. Kind of depends on what he thinks the odds are of them listening, especially given he’s this early in his term.”
Eleanor Mueller: Bessent’s spoken about administration efforts to consolidate fiscally; what are his options there?
Tom Hoenig: “There are none, except to convince the Congress and themselves that they can’t spend like this going forward. It’s been done before: World War II, following that, we had 120% debt-to-GDP. The Fed said, ‘We can’t do this anymore.’ The president didn’t like it, but the Congress understood it. In the next decade, they moved the debt to GDP from 120% to around 50%, with 4% growth. So it’s a doable thing, and it’s going to be a choice between doing it without going into crisis, and doing it after you’ve gone into crisis. And if we keep going on the way we are, we don’t know when, but ultimately I suspect we’ll have a crisis. Given the leverage that’s going on in the economy and so forth, it’s pretty hard to imagine not at some point entering a crisis.”
Eleanor Mueller: Warsh didn’t mention where the Fed’s taskforces are coming out; what are you most interested to hear from them?
Tom Hoenig: “I’m very, very interested in the balance sheet group and in the data group. … The balance sheet, because he has the capacity; would like to constrain the balance sheet; and today again, he really said it’s about interest rates as the primary. But I’ve noticed that the balance sheet is increasing. And so where do they want to go with that? I think it’s very important.”
Eleanor Mueller: No one expected Warsh to dwell on Fed independence — but do you think that, given the renewed attempts to fire Fed Gov. Lisa Cook, he should have?
Tom Hoenig: “I don’t see any sense in that move. No. 1, I think her defense is pretty good. No. 2, I think everyone sees it for what it is. No. 3, therefore, it’s probably not going to work.”
Eleanor Mueller: What’s the No. 1 thing you think people should be paying more attention to as they leave here?
Tom Hoenig: “The conference itself is very good. I think there’ll be more attention on the payment system and how that’s going to evolve with various technologies that are coming forward. And the other is, I notice that you’re right: The interpretation of the chairman’s remarks was more hawkish. So they’re going to be following them even more closely for any hints at all. And I don’t think he’ll give any hints, and I agree with that. When I first started on the FOMC, you’d go to the meeting, and the decision would be made there. Now everyone had their pre-notions, but you weren’t out signaling to the market ahead of the FOMC which way you were going to go. In the 9/11 crisis and the recession, that’s when forward guidance began, and then it was institutionalized in the great financial crisis. So it was never intended to be an ongoing thing, but it became that, which happens with tools. So here’s an opportunity that I think Kevin Warsh is trying to capture to get rid of that and get it back to: ‘Here’s our outlook.’ He gave an outlook speech, and we’re going to watch it carefully, and then we’ll decide at the meeting.”
Eleanor Mueller: Do you think people are conflating this idea of forward guidance with Warsh’s broader views on the economy?
Tom Hoenig: “Some are. The markets are more sophisticated than that. They’re looking for a free ride. And Kevin is taking that away from them, and I’m very, very happy that he’s doing it. They’re making plenty of money on their own. Why should you subsidize that? And that’s what forward guidance was. It’s a subsidy. Time to end the subsidy.”
Notable
- Warsh on Friday delivered his fullest account yet of how he views the economy — but his previous remarks are sowing doubt that he’ll back his hawkish lean with action next month, Eleanor reports.