Welcome to the briar patch, America.
Its thorns are the violent swings in the stock market and sharp drop in oil prices. The thicket grows as debate grows on whether we’re heading toward a recession.
It’s where we’ve landed as the Federal Reserve takes its first steps to end years of persistently easy monetary policy, or so says a former Fed policymaker from Kansas City.
The briar patch comment actually was made in a fretful forecast more than five years ago by Tom Hoenig, then part of the Fed’s policy group. It was revealed in recently released transcripts of Fed policy debates from 2010.
At the time, Hoenig was president of the Federal Reserve Bank of Kansas City. The job gave him a voice in the Fed’s debate and, in 2010, a vote on its policy decisions. He used that vote to publicly dissent against official Fed policy at every meeting that year.
The financial crisis and Great Recession were over, Hoenig argued, and the Fed should start to wean the economy off stimulus from the Fed. He said delay could lead to increasingly painful consequences once the Fed finally changed course.
Others saw standing pat as an insurance policy for the young economic recovery.
“But I think of it more as planting the seeds of a briar patch that we will have to deal with not a year from now, but three or four years from now, as we have in the past,” Hoenig said in the transcript of the Fed’s August 2010 session.
His argument failed, and the Fed waited until last December to raise its benchmark interest rate off zero, where it had rested since December 2008.
Hoenig’s concern then, and his belief now, is that the nation’s slow return to normal policy will have disruptive consequences and all the more so because the Fed waited so long to start.
“The longer you do this, the harder it will be to unwind it,” Hoenig, who now is vice chairman of the Federal Deposit Insurance Corp. in Washington, told The Star earlier this week.
He noted the gyrations on Wall Street, oil’s collapse and worries about economic damage here from struggling banks in Europe and China’s slowing economy.
“Now we have a world that’s in great difficulty,” Hoenig told The Star. “I think there is a reasonable case this is part of the consequence.”
Federal Reserve chairwoman Janet Yellen showed this week how the current Fed policy group is struggling to take its next step toward more-normal interest rates.
During hearings in Washington, she said a lot had changed since the first rate hike in December. But she held out the possibility of more hikes.
“We will meet in March, and our committee will carefully deliberate about what impact these developments have had,” Yellen said.
Financial markets, however, essentially have predicted that the Fed won’t raise rates anytime soon, and possibly not at all this year.
Hoenig, approached by The Star about the 2010 transcripts, said he doesn’t see the current environment as a realization of his concerns from 2010. This is not an “I told you so” moment, he said.
After all, unemployment is below 5 percent in the United States and asset prices, such as housing and many stocks, haven’t fallen drastically. And events unfolding now can be managed.
But Hoenig still sees potentially serious consequences as the Fed shifts toward normal interest rates and normal policies.
“I hope I’m wrong today, just as I hoped I was wrong then,” he said.
The Fed’s 2010 transcripts show that Hoenig had pushed throughout the year for the first steps away from the Fed’s aggressive interest rate and bond-buying programs. The August meeting produced the briar patch analogy and marked a shift toward a more emphatic plea from the dissenter of record.
A transcript of the September meeting showed Hoenig followed with a more direct argument that more ease won’t help.
“I am not arguing for high interest rates at all — I never have been. I am arguing for getting off of zero, getting away from thinking that if we only added another trillion dollars of high-powered money, everything would be OK. It won’t,” he said.
At the November meeting, Hoenig fully separated himself from the majority. The Fed was not backing off, and it was ready to boost its bond-buying program called quantitative easing.
“I acknowledge that we all want what is best. Certainly I do, and so I hope the committee is correct and that I’m wrong. I strongly disagree with the course being charted here today,” he said.
Finally, at the Fed’s last policy debate that year, Hoenig set the stage for what investors are seeing today.
He told his fellow policymakers that the exit “will be a major challenge, far more so than we’re willing to acknowledge today, in my opinion.”
“The markets will despair,” Hoenig said at the December 2010 meeting. “As a result, I suspect pressure for the committee to delay its exit from current policy will be significant.”