MNI BRIEF: Fed's George - QE Could Mean Higher Terminal Rate

Kansas City Federal Reserve President Esther George said Friday that ending the central bank's asset purchase program soon is appropriate and that although policy normalization remains some way off policymakers should consider what a larger balance sheet implies for its benchmark interest rate.

"All else equal, maintaining a larger 'normal' balance sheet should imply a higher 'normal' terminal policy rate, as higher policy rates are needed to offset the stimulative effect of the balance sheet's continued downward pressure on longer-term interest rates," she said in a speech to the American Enterprise Institute, noting that the Fed's balance sheet now totals just under USD8.5 trillion compared to the USD4.2 trillion in March of last year.

George, an FOMC voter in 2022, said if the zero lower bound is thought to be a costly constraint on policy, there might be an advantage in pushing towards a higher neutral policy rate, arguing for maintaining a relatively large balance sheet weighted towards longer-maturity assets.