MNI: Fed's George Downplays Need For Supersized Rate Hikes

Kansas City Fed President Esther George Monday said the case for the Fed to continue to remove policy accommodation is clear but pushed back against supersized hikes, citing recession risks, unpredictable impacts from tightening financial conditions and market volatility.

"With the policy rate still relatively low and a $9 trillion dollar balance sheet in the early stages of shrinking, the case for continuing to remove policy accommodation is clear-cut. The speed at which interest rates should rise, however, is an open question," she said.

"I’m certainly sympathetic to the view that interest rates need to increase rapidly, recognizing that current rates are out of sync with today’s economic landscape," she said in prepared remarks at an event for members of the Labor-Management Council. "I am also mindful of how the rate of change in tightening policy can affect households, businesses, and financial markets particularly during a time of heightened uncertainty."

Growing discussion of recession risk, with some now predicting interest rate cuts as soon as next year, she said, suggests the "rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust." Esther George dissented at the June FOMC meeting in favor of a smaller 50 basis point hike.

Additionally, the Kansas City Fed President cited recent Treasury market volatility as a reason to moderate future rate hikes. "To the extent that the current strains in the Treasury market can be attributed in part to heightened uncertainty about the path of policy rates, a steady path of rate increases, and predictably adjusting this path to incoming data, could improve market functioning and facilitate balance sheet runoff, especially as the pace of runoff accelerates later this year."

Still, George said the broad-based nature of inflation suggests that a tight economy is driving price pressures rather than individual supply disruptions and shocks and commented that the labor market remains tight.

The three-month moving average of the Kansas City Fed's LMCI-implied unemployment rate currently stands at 3.29 percent. "There has never been a lower reading for this measure since the LMCI began in 1992." (See: MNI INTERVIEW: KC Fed Index Implies Jobless Rate Nearing 3%)