MNI: Fed Needs To Eliminate Imbalances, Slow Inflation -George

The Federal Reserve faces an "extremely tight labor market" and needs to bring supply and demand into balance to lower inflation this year, Kansas City Fed president Esther George said Friday.

However, uncertainties including a global slowdown, how quickly U.S. consumers spend down their excess savings and rising unemployment as higher interest rates take their toll will factor into policymakers' deliberations on how much more tightening is necessary, she added.

"Ongoing inflationary pressures still reflect imbalances between supply and demand, but those imbalances have shifted as the tightness in product markets has given way to tightness in the labor market," she said in remarks prepared for Kansas City's Central Exchange program.

"Eliminating the imbalances that have been driving prices higher will be required to restore price stability," she said, without including specifics on her own forecasts for rates or the economy.

UNCERTAINTIES

Services prices continue to rise, boosted by a tight labor market, though goods prices have started to decline, she noted. The longer inflation remains above 2%, the greater the cost to un-embed expectations of rising prices, she said.

If households use some of their excess USD4 trillion in cash relative to pre-pandemic levels to boost spending, that could put continued pressure on imbalances and inflation and "call for further increases in interest rates to incentivize saving rather than spending," she said.

On the other hand, a recession in the euro zone and slowdown in China do not suggest "much of a buffer for the U.S. economy if growth were to slow appreciably more here," she said.

Policymakers will also undoubtedly face "more complicated choices and difficult communications" once markets begin wondering how the Fed will weigh inflation relative to a softening labor market in its policy decisions, she said.