Askume, Sept 19 – The former president of the Federal Reserve Bank of Kansas City said on Thursday that the Federal Reserve’s decision to cut interest rates by half a percentage point increased the risk of a resurgence of inflation.
“They are betting that inflation is under control,” Thomas Honig told the Askume Global Markets Forum . “They have shifted their focus to maintaining employment, which increases the risk of inflation rising again in the future.”
The Fed kicked off its easing cycle on Wednesday , cutting interest rates for the first time since 2020, citing “increased confidence” that inflation is moving toward the central bank’s 2% target as it now focuses on maintaining a healthy labor market.
Honig, who served as president of the Kansas City Federal Reserve Bank from 1991 to 2011, said the Fed’s sharp interest rate cuts have put further pressure on an already weak dollar.
The US dollar (.DXY) has weakened since July to December 2023 levels amid growing concerns that the Fed’s aggressively dovish stance could undermine its global strength.
Honig said a weak dollar would raise prices of imported products while boosting foreign demand for our goods, leading to inflationary pressures.
At the same time, in addition to a series of “pro-growth” policies, the US government also plans to borrow at least US$2 trillion of new debt to finance its fiscal deficit. Refinancing short-term debt may also push interest rates higher.
To avoid this, Honig said, the Fed could stop shrinking its balance sheet or consider resuming pumping money into the economy in the form of quantitative easing (QE).
“It’s a risk over the next six to nine months, but it’s a real risk that no one is paying much attention to and I’m watching it carefully,” he said.
