Former Kansas City Fed Chief Warns of Resurgent Inflation Risk Following Significant Rate Cut, According to Reuters

By Mehnaz Yasmin

The recent decision by the U.S. central bank to reduce interest rates by half a percentage point may heighten the risk of a resurgence in inflation, according to a former president of the Kansas City Federal Reserve.

Thomas Hoenig expressed concerns at the Reuters Global Markets Forum, stating, “They are gambling that they have inflation under control.” He noted that the Fed is now prioritizing employment, which could increase the risk of renewed inflation in the future.

On Wednesday, the Fed initiated its easing cycle with the first rate cut since 2020, citing “greater confidence” that inflation is aligning with the central bank’s 2% target, while also focusing on maintaining a healthy labor market.

This significant rate cut may also exert additional pressure on an already declining U.S. dollar, Hoenig remarked, having led the Kansas City Fed from 1991 to 2011. The dollar has depreciated since July, reaching levels not seen since December 2023, amid concerns that the Fed’s aggressive easing measures could weaken its global standing.

A weaker dollar will likely result in pricier imports and could stimulate demand for U.S. goods abroad, both of which contribute to inflationary pressures, according to Hoenig.

In conjunction with various “pro-growth” policies, the U.S. government is planning to borrow a minimum of $2 trillion in new debt to cover its fiscal deficit. This refinancing of short-term loans could lead to higher interest rates.

To mitigate this potential outcome, the Fed may halt its balance sheet reduction and could even consider reintroducing quantitative easing to stimulate the economy, Hoenig suggested.

He concluded, “That’s a risk over the next six to nine months, but it’s a real risk that no one’s paying much attention to, and it’s one that I’m watching carefully.”