US ‘slowing towards a recession,’ if it’s not already in one, former Kansas City Fed president warns

Thomas Hoenig, who served as president of the Federal Reserve Bank of Kansas City, said Wednesday he did not expect a “soft landing” as inflation hovers at its highest level in 40 years.

He pointed out during a “Mornings with Maria” appearance on Wednesday morning that he didn’t “know an easy way” to bring inflation back toward the Fed’s target of 2% or less without causing a recession.

A recession refers to a contraction in gross domestic product (GDP) activity, the broadest measure of goods and services produced in the entire economy, for two consecutive quarters.

It was revealed in late April that the US economy had cooled markedly in the first three months of the year as tangled supply chains, record inflation and labor shortages weighed on growth and slowed the pandemic recovery.

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The Commerce Department said last month in its second reading of the data that real GDP fell at an annual rate of 1.5% in the first quarter of this year, which was slightly higher than the first reading of the department.

Earlier this month it was revealed that inflation remained painfully high in May, with consumer prices hitting a new four-decade high, exacerbating financial stress for millions of Americans.

The Labor Department said the Consumer Price Index, a broad measure of the price of everyday goods, including gas, groceries and rents, rose 8.6% in May. compared to a year ago. Prices jumped 1% in the month-long period from April. Those figures were both higher than the headline figure of 8.3% and the monthly gain of 0.7% predicted by economists at Refinitiv.

Thomas Hoenig, the former Kansas City Federal Reserve Chairman, warns that if the United States isn’t already in a recession, America is definitely “slowing down” toward a recession. (istock / iStock)

Speaking on “Mornings with Maria” on Wednesday, Hoenig argued that the Fed was “so far behind the curve.”

“You can’t put invaluable policy in place, which they did with the great financial recession and now with the pandemic, and then it’s not just that you put it in place during the crisis, but you maintain this policy well after the crisis, which they did in 2010 – and now they did it again in 2021, and did not have really negative consequences,” he warned.

“And it’s now showing in both asset and price inflation.”

Hoenig argued that the Fed’s “massive tightening” will “inevitably further disrupt the economy.”

“So I don’t see an easy solution,” he continued.

Last week, the Fed raised its benchmark interest rate by 75 basis points for the first time in nearly three decades as policymakers intensified their fight to calm searing inflation.

The move puts the benchmark federal funds rate in a range between 1.50% and 1.75%, the highest since the pandemic began two years ago.

Officials also set an aggressive course of rate increases for the rest of the year. New economic projections released after the two-day meeting showed policymakers expect interest rates to hit 3.4% by the end of 2022, which would be the highest level since 2008. .

The question now is whether the Fed can successfully engineer the elusive soft landing – the middle ground between cutting demand to cool inflation without plunging the economy into a slowdown. Rising interest rates tend to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut spending.

Although officials have painted a mostly bullish picture of the economy so far, citing “robust” job gains and low unemployment, projections show policymakers have cut their outlook for gross domestic product in 2022 to 1 .7%, compared to 2.8% in March. Officials also expect unemployment to rise slightly to 3.7% this year and 4.1% by 2024 as they drive up borrowing costs and crush economic demand.

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Federal Reserve Chairman Jay Powell has dismissed the idea that central bankers are trying to provoke a recession, arguing that there are “no signs” of a broader slowdown. He sought to assure Americans that higher rates will not trigger a recession and that policy tightening is needed to rein in prices, which have been weighing on households nationwide.

Hoenig, Distinguished Senior Fellow at George Mason University’s Mercatus Center, argued Wednesday that “if we’re not in a recession, we’re definitely slowing down into a recession.”

He pointed to the “very high inflation” and the “global conflict”, which affected raw materials, in particular oil and wheat.

“And then you have to correct some very aggressive fiscal policies following the pandemic, and then the monetary policy excesses,” he continued.

Hoenig argued that quantitative tightening, along with higher interest rates, “is going to create a big reduction in liquidity” and “reduction in borrowing due to cost increases, which we’re seeing right now on the market. internal market and which create its own volatility and uncertainty.”

“So I would say the recession is a fair decision,” he argued. “Whether we are right now, I don’t know, but I think we’re pretty close.”

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Hoenig provided the insight a day after the National Association of Realtors announced that sales of existing homes in the United States had slowed for the fourth consecutive month amid rising mortgage rates and record prices.

Sales of existing homes fell 3.4% in May from the previous month to a seasonally adjusted annual rate of 5.41 million, according to the association, which noted that sales fell 8, 6% compared to the same period last year.

Megan Henney of FOX Business contributed to this report.

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