Aug 26, 2019

"Enormous" Pressure in Next Recession for Wider QE Purchases, Former FOMC Voter Predicts

Frank Fuhrig Media Relations Manager

One of the Federal Reserve’s strongest post-crisis internal critics continues to worry about the long-term repercussions of the US central bank’s bond-buying.

Thomas Hoenig, who was a 20-year participant in meetings of the rate-setting Federal Open Market Committee (FOMC) and rotating voter in monetary policy decisions as president of the Federal Reserve Bank of Kansas City from 1991-2011, says in Monday’s edition of the “Macro Musings” podcast that so-called quantitative easing distorted returns to capital, benefitting asset holders over wage earners.

The Fed bought more than $3 trillion in US debt and other federally-backed bonds from 2008 to 2014, soaking up safe-haven investments in hopes of forcing money into the private economy to stimulate growth. Hoenig said that one of his lingering concerns is a slippery slope toward even more direct intervention by the Fed.

“What's next?” he asked. “Some countries are talking about buying into the equity markets. So you've set a precedent, and my experience with precedents are they're very hard to reverse.”

With financial indicators pointing at a possible recession on the horizon, Hoenig said that the next downturn will produce “enormous” political pressure on the Fed and other central banks to buy other assets, possibly even corporate bonds and stocks: “It will certainly be pushed very hard by those who are elected to office because they're going to feel the heat.”

Hoenig, who voted against the FOMC’s highly-stimulative monetary policy throughout 2010, left the Fed to serve as vice chairman of the Federal Deposit Insurance Corporation from 2012 to 2018 and recently joined the Mercatus Center at George Mason University as a distinguished senior fellow.

He was unsure if the Fed would actually buy fully private assets in a bid to combat a future recession.

“However, I am absolutely confident the pressure to do so will be there. A lot of pressure to do so will be there because it is a simple solution: ‘Just buy the assets, raise the prices, that'll save the world.’ And what might there be in terms of consequences? … When you push long-term interest rates down and you push asset values up, what are the effects of that and what are the allocative effects of that? Those are the questions that central banks, I think, have the obligation to also ask before they go on these QE programs.”

Photo by Mark Wilson/Getty Images

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate