Fed's George Calls for Further Gradual Rate Increases

--No Mention of Inflation Trends

By Jean Yung

     WASHINGTON (MNI) - Further gradual interest rate increases are needed to

sustain the economic expansion and contain financial stability risks, Federal

Reserve Bank of Kansas City President Esther George said Thursday. 

     "With an economy growing at an above-trend rate and unemployment at a low

level, postponing the removal of accommodation poses risks to sustainable growth

and financial stability," she said in remarks prepared for a conference on the

American workforce in Austin, Texas. 

     "At this stage of the expansion, it is appropriate to move cautiously. But

waiting too long risks more aggressive moves, which, history shows can invite

prospects of recession." 

     Policy is very accommodative right now, and prolonging that risks

distortions in capital allocation toward "less fruitful, or perhaps excessively

risky, endeavors that could result in financial imbalances," she said. 

     "Moving interest rates at a gradual pace toward a level consistent with

longer-run growth is the best step to help promote a continuation of the

economic expansion," she said. George does not vote on rates this year. 

     She noted that the unemployment rate, at 4.4%, is already below estimates

of the natural rate of unemployment, but that there have been broad shifts in

labor force dynamics in the wake of the financial crisis. 

     Research by Kansas City Fed bank staff finds that the recent modest pickup

in labor force participation rate can be attributed to a decline in the number

of people exiting the labor force, especially among those 55 and older. 

     "This suggests that for older workers, the reduction in exits may indicate

that some workers were delaying retirement decisions," she said. 

     At the same time, employers are hiring both for more high-skill positions

that typically require a college education and for low-skill jobs, leaving a

vacuum in the middle. That means workforce development leaders face new

challenges on how to best equip workers with the skills in demand by employers,

George said. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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