A vocal Fed dissenter prepares to bow out

KANSAS CITY—Thomas Hoenig has, over the past two years, emerged as the Federal Reserve official most willing to challenge the ultra-easy money policies that the central bank has pursued. While most of his colleagues view near-zero interest rates and massive infusions of cash into the economy as the best hope to help the nation to emerge from its deep economic malaise, the soft-spoken president of the Federal Reserve Bank of Kansas City sees the central bank sowing the seeds of the next crisis. That’s why he dissented at all eight meetings of the Fed’s policy committee last year, and he would almost certainly be doing the same now if he had a vote this year. (Regional presidents rotate onto voting status every third year.)

 Hoenig is the longest-serving official at the table when the Fed’s policy committee meets, having become president of the reserve bank in 1991. He plans to retire this year. He discussed the risks he sees from the Fed’s easy money policies in his office with The Washington Post last week; below is an edited transcript.

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Washington Post: What’s behind the steep run-up in prices for oil and other commodities this year, and the decline in the last couple of weeks? Do you see broader inflation taking root?

 TH: When you put this much money into the economy, it’s got to deploy. Some of it is deployed into commodity assets. You’re going to have volatility in that environment, and we are seeing volatility. I can’t say that I’m surprised.

 If you’re talking about a long-term trend line, energy and commodities are trending up, partly because of demand factors, partly because of supply interruptions. I think you’ll see mostly a steady rise up in some of these assets, especially as monetary policy confirms the moves up.

 Remember, we’re in our third year of zero rates. That’s a long time to pump a lot of money into the economy.

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.

 This inflation we’re seeing is in everything now. It’s not just in gas. I go to the grocery store — it’s not just food, it’s all the other goods there. Apparel. Companies are telling me, “We’re seeing 20 percent price increases in our inputs and passing along 10 percent or more.” We’re starting to see the psychology of inflation slowly change.

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.” We’re already seeing it in some of the surveys that we run. Businesses are telling us, “Yes, we had a pay freeze a year and a half ago, but we’re doing some catch up now. We want to make sure we keep our good people.”