MNI: Fed's George Endorses 'More Measured' Rate Increases

Federal Reserve Bank of Kansas City President Esther George on Thursday joined a growing chorus of officials calling for slower interest-rate increases in coming months, arguing a "steady and deliberate approach" to hikes would help avoid contributing to market volatility.

"The speed at which rates have increased has likely contributed to the marked increase in policy rate uncertainty," she said in remarks prepared for an annual energy conference hosted by the Kansas City and Dallas Fed banks.

"As the tightening cycle continues, now is a particularly important time to avoid unduly contributing to financial market volatility, especially as volatility stresses market liquidity with the potential to complicate balance sheet run-off plans."

"A more measured approached to rate increases may be particularly useful as policymakers judge the economy’s response to higher rates," she said.

HOW HIGH

It's hard to estimate where the fed funds rate will peak but policymakers will look for clues in how the economy and inflation respond to interest rate changes, George said.

Some have argued that a "minimum standard for a restrictive policy is a positive inflation-adjusted, or real, rate of interest," she noted. That would suggest real rates remain negative still, as consumers tell surveys they expect inflation to be 5% over the next year and the fed funds rate just just below 4%.

"This measure would point to considerably higher rates than current levels," she said. "The degree of tightening necessary will only be determined by observing the dynamics of the economy and inflation and cannot be predetermined by theory or pre-pandemic benchmarks."