Former Fed official warns central bank walking ‘very thin’ line, predicts when US will face recession

Former Kansas City Fed President Thomas Hoenig argued on Wednesday that a recession in the U.S. could potentially happen "sooner than next year" amid the central bank's expected aggressive tightening measures. 

Hoenig made the comments on "Mornings with Maria" on Wednesday, one day after Federal Reserve Governor Lael Brainard suggested that central bank policymakers could soon move aggressively to tighten policy as it seeks to cool red-hot inflation. 

"Inflation is much too high and is subject to upside risks," Brainard said in remarks prepared for delivery at a Minneapolis Fed conference. "The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted."

Hoenig said on Wednesday that he expects a recession in 2023 if the Federal Reserve sticks "to tightening policy as aggressively as it’s outlined in these speeches and what Governor Brainard said yesterday, I think there is a high risk of a recession."

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He then said that he fears that the risk of recession will cause the Fed "to back off before inflation is brought down and I think inflation is going to be higher than 7.9% with this next reporting."

Inflation hit a fresh 40-year high in February with the consumer price index climbing 7.9% on an annual basis, according to data released last month by the Bureau of Labor Statistics. Month over month, inflation rose 0.8%.

Inflation data for March will be released next week.

Hoenig stressed that the Fed will have to tighten to curb inflation, but warned that "when you tighten this much, you begin to see a slowdown in the economy." 

He also argued that the central bank was "so far behind the curve when they entered this process that now the catch-up is going to be more difficult and more painful than I think anyone wants."

The Fed voted in March to raise its benchmark federal funds rate by 25 basis points to a range between 0.25% and 0.5%. Officials projected at least six more, similarly sized increases over the course of this year.

But in the weeks since then, several policymakers – including Fed Chairman Jerome Powell – have floated the possibility of a more aggressive trajectory amid concerns that the central bank waited too long to begin tightening policy.

"I think the line they’re walking is very, very thin," Hoenig said on Wednesday, warning that the Fed is facing "almost an impossible challenge ahead of them." 

"They’re predicting that we’ll have this reduction in inflation and we will do it without a real significant increase in unemployment. I think that would be very pleasing if it were to occur, but I think it’s highly unlikely," he told host Maria Bartiromo. 

He stressed that it is reasonable to expect a "recession next year and depending on how much they [the Fed] move those 50 basis points forward towards us, maybe sooner than next year in terms of the slowdown." 

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"When you tighten policy through the extent that they’re talking about or speculating on in terms of 50 basis points and reducing the balance sheet at the same time, that’s a double whammy," Hoenig said. 

"I have not in my experience witnessed a very consistent tightening series without there being a major slowdown in the economy and a risk of recession," he added. 

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FOX Business’ Megan Henney contributed to this report.