Tom Hoenig, the former Kansas City Fed president who once held a voting seat on the FOMC, thinks the central bank is about to step on a rake. Speaking recently with Adam Taggart, Hoenig laid out his concerns about what's coming in December: a rate cut that probably shouldn't happen.
His read on Fed Chair Jerome Powell? "Chairman Jerome Powell is holding his cards very close to his chest. I think he's probably counting votes, not wanting to be on the losing side of the vote," Hoenig says. He thinks the final tally could land at 7-5, which would be unusual. The easier path is to cut.
But Hoenig isn't buying the logic. With unemployment around 4.1% and the economy holding up reasonably well, why ease now when inflation is still running hot at 3%—a full percentage point above the Fed's stated target? "The economy is doing reasonably well," he points out, "so why ease now when the 'inflation dragon' is still breathing fire?"
What really concerns Hoenig is the narrative creep. If the Fed cuts now, it risks quietly accepting 3% inflation as the new normal without ever officially changing its mandate. That might not sound dramatic, but compounded over years, 3% inflation steadily chips away at purchasing power for the bottom 80% of households who don't have stock portfolios or real estate holdings to protect them.
The Fiscal Trap Tightening
Then there's the debt problem lurking in the background. The U.S. is running a $2 trillion annual deficit with $38 trillion in outstanding debt, and Hoenig believes the country is approaching a point where keeping the Treasury market functioning becomes an unofficial Fed mandate.
"So, we have price stability mandate, maximum employment mandate, low long-term interest rates mandate, and now we have to make sure the Treasury market is liquid and functioning fully," he notes.
High interest rates threaten to blow up the debt entirely, which means the Fed could eventually be forced into printing money to buy government debt and suppress rates below market levels.
Hoenig doesn't think there are easy outs. When asked if tariff revenues could help chip away at the debt—a talking point gaining traction in Washington—he's blunt: the math doesn't work. Current tariff income can't even cover the annual deficit, much less touch the $38 trillion principal. The real solutions would require cutting mandatory spending like Social Security and Medicare or raising taxes substantially. "Neither of which Congress seems willing to do," he explains.
QE's Likely Return
That's why Hoenig gives quantitative easing better than even odds of making a comeback. Not because it's smart policy, but because it's politically easier than making hard choices. He traces the problem back to the Fed's massive QE program in 2010, which "made it easy for politicians to spend without consequence" by keeping rates pinned at zero for years.
His solution is radical: introduce statutory limits on how much the Fed can expand its balance sheet—perhaps 2-4% annual growth tied to real economic activity. Exceptions would only be allowed for genuine crises, and they'd be temporary.
"If you could really limit reserve creation, you would, you would accomplish something maybe better than the gold standard. Assuming, and this is a big assumption, that you stuck with it," he concludes.
It's a bold idea, though admittedly one that requires Congress to tie its own hands—never a sure bet.