Kansas City Fed President, Noted inflation hawk and 2010 voting member of the FOMC Thomas Hoenig is leaving the Federal Reserve. Here’s an exit interview he did with the Washington Post, which lays out his two main worries about the current economy. Worries that have solidified him as an inflation hawk amidst disinflation and high unemployment:
WP: So is that happening now? Are peoples’ inflation expectations rising in ways that are dangerous?
TH: Think about it this way: The inflation of the 1980s started in the mid-’60s. It is a slow process along the way, but if you leave policy easy, then inflation will eventually catch hold…..
WP: One place where there’s not any inflation is in wages. Can you really have an inflation problem without wages rising?
TH: Not initially. But people are losing real purchasing power, and that changes how they’re going to negotiate. People want this lost purchasing power back in time. In negotiating, they’ll say, “Prices have been rising, we deserve more.”…
Fear of the 1970s, really?
I pointed out once that, just as some neoconservatives famously said that there is no “After the Cold War,” for an inflation hawk there is no “After the Professional Air Traffic Controllers Strike Strike.”
What are the fears? Besides the fact that they are fears of things that could happen in the future, as opposed to the unemployment crisis that is definitely happening now, they are fears of the 1970s. The biggest fears are wage-push inflation that could kick in any year now, even though we aren’t projected to get to full employment for over two years and there aren’t union contracts like there were back in the 1970s.
The other is that we could have inflation 15 years from now, akin to how the mid 1960s set up the economy for peacetime inflation problems down the road.
To keep that line of thought going you need to do some pretty intense mental gymnastics. You have to find a way to think that Bernanke instituting QEII and then abandoning it with 9% unemployment is somehow akin to Arthur Burns running the Nixon reelection campaign out of the Federal Reserve. Or that Obama, instead of being a pretty straight-up economic neoliberal, is going to reinstate the 1971-1973 price controls to fight imaginary bond vigilantes and imaginary runaway core inflation.
This is about as bad of a mental framework as one can take to our current problems. It would be great to have some other people on the FOMC who aren’t working in this paradigm. People who could be voting if Obama was more aggressive with appointing members to the Committee.
This is important because Hoenig’s vote on the FOMC is more important for the recovery than getting your favorite infrastructure project funded through the Senate. A strong inflation hawk dissenting group can balance out fiscal policy if they want to, and we have few people trying to get different voices into that space.