Meet the former Fed dissident who warned about inflation and opposed Ben Bernanke’s policies

Aging Gen-Xers and Baby Boomers are old enough to remember a time when it wasn’t uncommon to earn 10% or 11% interest on a certificate of deposit. In recent decades, however, the U.S. Federal Reserve has aggressively pushed for lower interest rates. But one economist who has been an outspoken critic of lower interest rates and quantitative easing is Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City.

Hoenig, now 75, is the focus of an in-depth article written by business reporter Christopher Leonard and published by Politico on December 28. Leonard stresses that during the Barack Obama years, Hoenig wasn’t shy about criticizing the lower interest rates/quantitative easing program of then-U.S. Federal Reserve Chairman Ben Bernanke.

“Between 2008 and 2014,” Leonard explains, “the Federal Reserve printed more than $3.5 trillion in new bills…. Hoenig was the one Fed leader who voted consistently against this course of action, starting in 2010. In doing so, he pitted himself against the Fed’s powerful chair at the time, Ben Bernanke, who was widely regarded as a hero for the ambitious rescue plans he designed and oversaw. Hoenig lost his fight.”

During the Obama years, Hoenig warned about inflation. But Leonard stresses that inflation was only one of his warnings.

“While Hoenig was concerned about inflation, that isn’t solely what drove him to lodge his string of dissents,” Leonard recalls. “The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.”

The U.S. Federal Reserve lowered interest rates considerably during the early 2000s recession as well as the Great Recession and the pandemic recession of 2020. And interest rates are still close to zero in late 2021, a time when inflation is grabbing the financial headlines.

“To respond to rising inflation,” Leonard notes, “the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.”

Leonard told Politico, “There is no painless solution. It’s going to be difficult. And the longer you wait, the more painful it will end up being.”

Hoenig speculates that the Federal Reserve’s monetary policies of the Obama years may have played a role in Donald Trump’s presidential victory in 2016.

“Do you think that we would have had the political, shall we say turmoil, revolution, we had in 2016, had we not had this great divide created?” Hoenig told Politico. “Had we not had the effects of the zero interest rates that benefited some far more than others? I don’t know. It’s a counterfactual. But it’s a question I would like to pose.”