Thomas Hoenig, a Mercatus Center senior fellow and former Kansas City Fed president, said gradual rate increases would be appropriate because inflation near 4% leaves little real restraint against the Fed’s 2% goal.
Hoenig made the case in an Oct. 28 interview with David Lin. He said a short-term policy target of 3.5% to 4% alongside inflation near 4% put the inflation-adjusted rate close to zero. In his view, restoring price stability called for a moderately restrictive policy.
Hoenig also said 2% growth was not especially strong for the U.S. economy relative to its capacity. Asked whether falling oil prices might make policy too tight, he said that risk appeared limited at current rates and inflation.
He linked the slow return to the inflation target partly to government spending after COVID and efforts to rebuild domestic industrial output. Hoenig said policymakers pursuing a soft landing had not fully accounted for those forces.
Hoenig said rates held below neutral can encourage speculation and favor borrowers over savers. Separately, he warned that keeping rates extremely low for a long time can distort how resources are allocated.
Hoenig said conditions in 2010, including gains in industrial production, gross domestic product and employment, gave the Fed an opening to normalize rates gradually. He said a 2010 increase from zero to 1% would have kept borrowing costs low enough to aid the recovery. He added that selling some of the Fed’s mortgage-backed securities could have reduced its balance sheet, and warned that a large, complex economy accustomed to rates near zero could face a disruptive return to more normal conditions.
