Will Fed Cut Rates To 0%? Former Fed President Reveals Next Move | Thomas Hoenig

Here is a chronological list of distinct topics, claims, and statements from the transcript:

1. The economy is in the early stages of a bubble, characterized by increasing uncertainty and leverage, which will continue as long as asset prices rise, leading to a potentially "nasty exit."
2. The stablecoin industry is anticipated to seek permission to back stablecoins with higher-risk assets, eventually leading to a loss of confidence, a run, and demands for Fed bailouts.
3. The guest, Thomas Hanik, a distinguished senior fellow at the Mercatus Center and former high-ranking official at the Kansas City Fed and FDIC, was welcomed to discuss the economy, the Fed, and stablecoins.
4. The Federal Reserve is expected to ease interest rates, despite a strong economy and 3% inflation, which is above their target.
5. Chairman Powell will likely be cautious in his press conference, emphasizing employment numbers to justify the rate cut, and will avoid strongly signaling another cut for the next meeting.
6. There will be significant pressure from markets and politicians for another rate cut by December, though future actions are uncertain due to a lack of complete data.
7. A new Fed chair is unlikely by December but highly probable by January or February, given the time required for Senate hearings and confirmation.
8. A new Fed chair will significantly influence policy direction by leveraging the "bully pulpit" of the position, and the appointee will likely command substantial authority over the committee.
9. Jerome Powell is not expected to remain on the board as a governor after his term concludes, as it would be difficult for him to challenge the new chairman or nominees.
10. The named finalists for Fed chair (Waller, Bowman, Hasset, Warsh, Reer) are mostly well-known and qualified, with the final choice likely influenced by the president's preference for a candidate aligned with his agenda.
11. The potential Fed chair candidates have varying monetary policy stances: Warsh is hawkish, Hasset is neutral, Waller is dovish, and Bowman shows a mixed dovish-to-hawkish approach (wanting balance sheet shrinkage but supporting rate cuts).
12. The assumption that rate cuts will occur regardless of inflation is not guaranteed; if inflation rises too quickly, some candidates might advocate for halting cuts or even raising rates, as excessive inflation would be blamed on the administration.
13. The current 3% headline CPI, a significant increase from earlier in the year, aligns with expectations due to inflationary pressures from tariffs, substantial AI investment, and robust consumer spending, with Q3 GDP growth projected near 4%.
14. Recent workforce reductions by major tech and other companies (e.g., Amazon, UPS, Intel) are partly attributed to automation and cost-cutting, with some concern about their impact on the overall labor market.
15. These layoffs are seen as somewhat unique to the tech industry, driven by a focus on AI investment, while other sectors like healthcare show strong employment growth. Overall, the economy is slowing modestly, with unemployment estimated around 4.5%.
16. The Fed would be concerned by a significant increase in the unemployment rate, likely above 4.6-4.7%, or a rapid rate of change in unemployment.
17. The labor market is experiencing a balance between slowing demand and a slowdown in immigration and labor supply, suggesting laid-off experienced workers will be re-employed quickly, but new entrants may face more difficulty.
18. The economy is in an "unusual equilibrium" of slow hiring and slow firing, reflecting balanced demand and supply dynamics without a sharp downturn in labor.
19. Recent plunges in regional bank stocks, particularly Phoenix-based Western Alliance Bancorp and Zions Bancorporation, were linked to exposure to "bad loans," some involving deliberate fraud and duplicated collateral.
20. These regional bank issues, distinct from the market risk problems of Silicon Valley Bank, indicate a credit risk problem arising from speculative lending during a period of economic "blitz" and increasing leverage.
21. As a result, regional banks will intensify their scrutiny of loan portfolios, tightening lending standards and double-checking collateral in the coming quarter and beyond.
22. Credit risk develops in growth economies when competitive pressures lead banks to relax loan covenants and collateral checks, lending to companies with weaker balance sheets and higher leverage, which become exposed if the economy slows.
23. An easing of monetary policy by the Federal Reserve, which lowers interest rates and stimulates the economy, typically encourages banks to search for yield and can lead to an easing of lending standards.
24. The tokenization of money, as seen with Goldman Sachs and BNY transforming money market funds into tokenized assets, involves encrypting and recording ownership on a blockchain platform.
25. Stablecoins function differently, by issuing a token liability backed 100% by reserves (e.g., government securities, bank deposits) under the Genius Act, theoretically carrying zero credit risk but still subject to market risk (e.g., if interest rates rise).
26. The stablecoin industry is predicted to eventually lobby for permission to back stablecoins with less liquid, higher-credit-risk assets, which would significantly increase the risk profile of these instruments.
27. Stablecoins are unlikely to dramatically bolster demand for US treasuries or re-establish the dollar as a global reserve currency; the falling 10-year yield is primarily driven by market expectations of Fed rate easing and potential changes to the Fed's balance sheet management.
28. The idea that stablecoins can solve the government's debt problem is a fallacy, as government debt always finds a place at a certain price, with the Fed's monetization activities being a more significant factor.
29. Concerns exist about crypto asset service providers offering yield-bearing stablecoin products, which can blur the lines between payment instruments and investments, competing with bank deposits but lacking equivalent regulatory oversight.
30. The stablecoin industry is expected to find indirect ways to offer interest and lobby to use less liquid, higher-risk assets as reserves, which would increase leverage and risk.
31. These practices could lead to moments of lost confidence, causing stablecoin runs and demands for Fed bailouts, especially if Governor Waller's idea of stablecoin accounts with the Fed makes the Fed a counterparty.
32. While some stablecoin providers operate like banks by lending out reserves, the Genius Act reportedly restricts rehypothecation of these reserves.
33. For consumers, the unique value of stablecoins primarily lies in facilitating instant international payments; for domestic transactions, existing options like Zelle or FedNow already provide efficient payment services.
34. The FDIC should not backstop crypto asset companies or self-custodied wallets, as it would broaden the safety net and increase moral hazard, given that consumers have a choice between insured banks and uninsured crypto options.
35. Historically, money markets, which share structural similarities with stablecoins, have broken the buck and required taxpayer bailouts, demonstrating the non-free nature of government guarantees.
36. In the event of a crypto hack, the government's role should be to find the source of the stolen funds and facilitate their return, not to insure depositors against losses that arise from their choice of where to place money.
37. The economy is currently extended and undergoing releveraging, increasing its risk profile, but it is not yet in a severe slowdown that puts the banking industry at immediate risk from a housing bubble or widespread bad loans.
38. A pickup in M&A activity in the tech space, particularly around AI, is a speculative trend akin to the dot-com bubble, where companies invest in one another to boost stock prices.
39. These speculative trends typically cease when investors realize the actual return on investment does not match expectations, relying more on stock price appreciation than true earnings growth.
40. The Federal Reserve must monitor capital markets, given the enormous wealth accumulated there (stock market up five times compared to 1.5 times for GDP in 20 years), as a major correction would almost certainly slow consumption, investment, and lead to slower economic growth or recession.
41. Thomas Hanik can be followed at mercatus.org.