Transitory’s Japanese Cousin

Thomas Hoenig was President of the Federal Reserve’s Kansas City branch for two decades. He left that post in 2011 to become Vice Chairman of the FDIC. Before that, Mr. Hoenig as a voting member of the FOMC in 2010 cast the lone dissenting vote in each of the eight policy meetings that year (meaning he was against QE2, too). This makes him, apparently, the hawk of all hawks.

In January 2011, in his capacity as still President in the Kansas City branch, Hoenig told an audience in Kansas City that though he was no longer a voting member of the Committee (he had starting in 2011 rotated off as regional branch presidents do) his same concerns remained.

As we begin 2011, recent economic data indicate a firmer tone in the outlook, and I am increasingly confident that the recovery is both sustainable and likely to gain strength over the next several quarters.

The primary danger to his outlook as he saw it then was the fiscal deficit. As to the other, he said, “A second concern I have is the consequences that will follow when we combine our current fiscal projections with a highly accommodative monetary policy.” The issue for him was, as in 2010, lags. According to his view, the FOMC was in danger of not thinking far enough ahead. They were being too cautious and risked letting inflation run wild given how much stimulus, so called, had been invented and introduced.

[I] am pleased to be able to say that in my view the economy is in recovery, although at a moderate pace. Over time, barring unexpected surprises, the recovery should gain momentum, which will encourage hiring and slowly bring down the unemployment rate.

About that, “unexpected surprises” were just around the corner. Merely a few months forward, the BEA would show that the US economy had already entered a downturn (as Hoenig was speaking) and ultimately the global eurodollar system would experience another major crisis that summer. And during that near-panic, the FOMC would carry on deliberations stunned, truly bewildered not just that it was happening but that something so serious ever could given so much presumed liquidity and “money printing.”