MNI INTERVIEW: Fed Should Avoid Rushing Into Rate Cuts-George

MNI (WASHINGTON) - Federal Reserve officials should resist market pressure to begin cutting interest rates before inflation is actually heading sustainably back to its 2% target and while employment is still strong, former Kansas City Fed President Esther George told MNI.

“Inflation is still well over their target even as it inches down, and there are dynamics out there that mean we have to acknowledge upside risks to inflation,” George said in an interview Thursday.

“Housing has proven to be a pretty persistent source of that inflation -- and services too. I think you're just going to have some durability to this inflation. That makes me think, don't jump the gun on this, and don't get pressured into cutting until you really do have confidence.”

Geopolitical tensions in the Middle East and the threat of higher oil prices, in addition to ballooning U.S. fiscal deficits that she called increasingly problematic, also pose increased inflationary threats and create uncertainty around the neutral rate, she said.

“I just look at our fiscal deficits, and I'm thinking, is anybody watching this?" she said. "Because at the same time that we've seen the Fed quantitative tightening, the rest of the world maybe have less of an appetite for some of this debt than they have in the past. They have to be careful that we’re not launching on a path of getting to a number that we don’t really know."

LEANING ON SEPTEMBER

Chair Powell “leaned pretty hard on September,” said George, making clear he would probably like to steer the FOMC toward a first rate cut at the central bank’s next meeting, even if achieving consensus for such a move will take some work. (See: MNI FED WATCH: Ready To Cut Rates As Soon As September)

“I have a feeling it's mixed enough that the chairman will have some real work to do to understand where the center is,” she said.

Powell’s dovishness during the press conference notwithstanding, George said the market’s pricing of as many as three rate cuts this year looks overdone.

“It sounds like a pretty significant move in the face of growth that is, in my view, well above its long run sustainable pace, and a labor market that is strong,” she said. 

“Coming off its tightness is one thing, but to say it's other than strong I have a hard time believing that. So when I think about the other dynamics in the environment around fiscal deficits and other things, I'd be careful not to try to gauge too much easing here."

DEFICITS AND QE

George, who was often a skeptic of the Fed’s balance sheet expansion during her 12 years as a sitting policymaker, said she thinks the central bank needs to take a closer look at the usefulness and risks of embarking on QE in the future.

“I’ve always thought we’re not paying enough attention to balance sheet policies. It’s a missed opportunity whether it gets addressed in the framework or at some point – we keep rolling around with QE as being a benign source of policy, of interaction with the economy, and I wish there more discussion about it,” said George.

Developing a firmer grasp of the balance sheet as a policy tool is especially important when large deficits could lead to a growing temptation to lean politically on the central bank. (See: MNI INTERVIEW: Fed QT Likely To Linger After Rate Cuts Start)

“When you begin to look ahead at what I think will be a lot of pressure on the central bank relative to fiscal, debt and deficits, you have to start asking that question, what does it look like when a central bank faces pressure around its balance sheet and some of those policies?”