MNI INTERVIEW: Fed’s Easing Bias No Longer Justified-George
MNI (LONDON) - Federal Reserve officials are running out of reasons to keep lowering interest rates as inflation remains stuck above the central bank’s target and strong growth suggests policy is not all that restrictive, former Kansas City Fed President Esther George told MNI.
“I was not as sanguine as some of the headlines I read about the last inflation report. What you risk losing sight of is that things have leveled out, not just a few ticks above the Fed’s stated target – it seems persistent to me. Persistence above the target is a red flag,” George said in an interview.
“I thought the Fed moved too soon to say risks were balanced as opposed to accepting we have some upside risk.”
She said the core of the FOMC still appears keen to keep cutting interest rates, but it will require convincing improvement in the inflation outlook to do so.
“The [easing] bias is still there. The bias is we’re on pause, which suggests, and then we’re going to continue cutting. I’d be very careful with that kind of communication,” she said. (See MNI INTERVIEW: Fed On Hold, Next Move Could Be Hike-Andolfatto)
“They’d like to move to below 4% -- there’s a bias for two cuts. I think it’s either two or none. Their hands will be tied, they’ll have to have a compelling story to say this is why they’re comfortable moving.”
The Fed’s desire to keep pushing rates lower is also predicated on the questionable notion that the neutral rate has not risen all that much, she added.
TARIFF RISK
Ongoing risks to inflation are accentuated by the prospect of tariffs and immigration restrictions from the new Trump administration, said George. Trump has threatened to impose tariffs on key trading partners like China, Canada and Mexico.
“Now we’re just waiting for magnitudes. I haven’t seen anybody that has really said tariffs would be neutral on inflation or deflationary. I think it goes the other way. We’re at a time where even adding a few tenths to inflation wouldn’t make me feel good,” said George, who led the KC Fed from 2011 to 2023.
Even before the new policies are implemented, a strong growth and employment backdrop already belied the notion of restrictive monetary policy, she said.
“I don’t know that I would have been as comfortable cutting in December. You were already seeing signs then that with the easing that had already occurred, it didn't look like we've had much restriction on the economy overall."
DEFICIT WORRIES
Another key fuel for inflation is an ever-growing budget deficit, with little prospect for it to shrink, said George, who is on the board of the Committee For a Responsible Federal Budget.
“Not that people aren't talking a lot about it, but the people that need to do something are not ready to make that move. So I think you'll continue in a deficit spending situation to have pressure on the 10-year and longer-term rates,” she said.
While wages might not be a primary driver of inflation, the idea that workers still want their paychecks to catch up to the post-Covid shock to the price level remains a factor to watch, George said.
“I don't see anything that really brings it down,” she said of inflation prospects for this year. “I see policymakers really hanging their hat on inflation expectations being anchored. That can be fleeting, you don’t know they’ve moved until they’ve moved.”