Fed's next move could create market ‘volatility, uncertainty,' ex-Kansas City Fed president warns

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Fed should be ‘very careful’ to ‘not signal’ a future move that could create market ‘volatility’: Thomas Hoenig

Former Kansas City Federal Reserve President and CEO Thomas Hoenig on the Fed’s November meeting and how the bank will address inflation and interest rates.

What kind of rate hike is the Fed planning for after November’s meeting? Former Kansas City Federal Reserve president and CEO Thomas Hoenig believes no one knows, and any signs given at Wednesday’s meeting could mean "more volatility" and "uncertainty" in the market.

"I don't think the Fed has an endpoint in mind because they don't know where inflation is going from here," Hoenig said in an interview on "Mornings with Maria" Tuesday. "They're hoping that it will moderate, but they don't know that. So they'll be, I hope, very careful in what they say at tomorrow's press conference and not signal any kind of future move. Now, that means there'll be more volatility because it will create uncertainty."

Federal Reserve officials are expected to maintain their hawkish stance at tomorrow’s policy-setting meeting where they are likely to approve another super-sized interest rate hike, paving the way for borrowing costs to climb above 5% by March 2023, according to a survey of Bloomberg economists.

Hoenig told host Maria Baritromo he’s also expecting a 75-basis point hike and that expectation is pretty "baked in the cake," but warned December’s rate hike will come with more "issues."

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The U.S. central bank is predicted to approve a 50-basis point increase in December, followed by 25-basis point increases at the following two meetings in February and March, Bloomberg participants had reported. The rapid tightening of policy is likely to trigger a U.S. and global recession, according to the survey.

The Federal Reserve’s November meeting could cause “volatility, uncertainty” in the markets, former Kansas City Federal Reserve president and CEO Thomas Hoenig said on “Mornings with Maria” Tuesday, November 1, 2022. (Getty Images)

Though Hoenig held that December’s rate hike is mostly unknown, the former Fed president agreed a recession is likely in 2023 as the bank tries to shrink its $9 trillion balance sheet and take liquidity out of the market.

"You hear people talking about liquidity in the treasury market right now, there's still a lot of liquidity in that market, and pulling that out means you begin to constrain the economy and, I think, create uncertainty around the financial sector," Hoenig explained. "So that will be an add-on to the inflation uncertainty as we move forward from here."

Shrinking the balance sheet too quickly, Hoenig warned, would "shock" the economy and U.S. banking system.

"Their challenge is huge, both in the liquidity side, how do you keep that balance? And on the interest rate side, not to choke off the economy and bring it into a major recession?" the former Fed official questioned. "I think a recession's pretty much going to occur as they continue to tighten and shrink their balance sheet. It's the degree that I think is really in discussion right now."

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America’s macroeconomic story for 2023 is shaping up to be a "very difficult year," Hoenig said, predicting the Federal Reserve will have "a pretty tough time" moving rates up after keeping them low for a decade.

"We haven’t yet made meaningful progress on inflation," Fed governor Christopher Waller had said during a recent speech.

In an even more concerning development that suggests underlying inflationary pressures in the economy remain strong, core prices, which strip out the more volatile measurements of food and energy, climbed 0.6% in September from the previous month. From the same time last year, core prices jumped 6.6%, the fastest since 1982.

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"[In] 2023 we're going to see a recession, and I think it'll be a fairly difficult one," Hoenig added. 

"The advantages going in right now, I recognize them, is unemployment remains relatively low, that's true. There is still a lot of momentum in the economy, that's true. But there's also a lot of other issues, so we have a tough year ahead."

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FOX Business’ Megan Henney contributed to this report.

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