MNI: Fed's George Prefers Steady Hikes, Faster Runoff

Kansas City Federal Reserve President Esther George said Wednesday it is clear that removing accommodation is required and laid out a more cautions stance on raising the federal funds rate, paired with a desire to roll assets off of the central bank's balance sheet faster.

"Given the state of the economy, with inflation at a 40-year high and the unemployment rate near record lows, moving expeditiously to a neutral stance of policy is appropriate," she said, characterizing recent inflation as a result of supply constraints in the face of strong demand.

"While much of the economic fallout so far has been directed towards further disruptions to supply, both of these risks have implications for demand as well as supply. Assessing the balance in real time will be difficult. Recognizing these risks is not an argument for stalling the removal of accommodation, but it does suggest a steady, deliberate approach for the path of policy could provide space to monitor developments as they unfold," she said.

Another consideration for policymakers is judging how responsive economic activity is to the level of the interest rate, she said, suggesting higher rates could hit durables spending hard yet higher liquidity levels might make consumption resilient. "A steady, deliberate approach to removing accommodation will allow policymakers to observe where this equilibrium might be."

On the balance sheet, George pointed to concerns about an inverted yield curve, not as a predictor of recession, but for its implications for financial stability with incentives for reach-for-yield behavior. "As the FOMC begins the process of removing accommodation, not only will the policy rate need to rise, but the balance sheet will need to decline significantly."

MORE RESTRICTIVE

The Kansas City Fed chief, who is an FOMC voter this year, also presented a scenario where interest rates would have to be more restrictive and move above neutral.

"The degree to which fading disruptions contribute to an easing of inflation and the lags of policy actions will be relevant for what happens after more-neutral policy settings are accomplished," she said. "If at that point inflation shows signs of remaining elevated, more restrictive policy may be required to meet our price stability objective and to reinforce an anchoring of inflation expectations."

"In the event high inflation persists while demand turns down, and the labor market falters, policymaker resolve could be tested," said George, in prepared remarks to the Economic Club of New York, adding that a "soft landing is possible but not guaranteed."