MNI: Fed’s George Wants Prompt Asset Normalization

The Federal Reserve can afford to start winding down the size of its balance sheet by allowing maturing assets to runoff much more quickly than the last time central bankers shrank the balance sheet, Kansas City Fed President Esther George said Tuesday.

“My own preference would be to opt for running down the balance sheet earlier rather than later as we plot a path for removing monetary accommodation.” George said in prepared remarks. “It will be appropriate to move earlier on the balance sheet relative to the last tightening cycle.”

Minutes from the Fed’s December meeting showed policymakers are actively debating balance sheet runoffs, and some officials favor starting them shortly after the first rate hike, which could come as soon as March.

George said she sees a strong economic backdrop, including a booming job market, persisting despite the Omicron variant of covid and complaints of labor shortages.

INFLATION PRESSURES

“With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook," she said. “My own expectation is that the strength of the underlying fundamentals will continue to support solid consumption growth."

The Fed’s preferred PCE measure of inflation jumped 5.7% in the year to November, though George found some comfort in a recent easing of supply chain pressures.

“Slowly, these disruptions are being dealt with, and there are indications that the worst has passed as shipping rates have peaked and port backlogs are being cleared,” she said.