MNI POLICY: Fed George: Rate Setting Appropriate; Infl Benign

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve's patient approach to adjusting

monetary policy remains appropriate despite persistently below-target inflation,

given the context of a growing economy and tight labor markets, Kansas City Fed

President Esther George said Tuesday.

     "This wait-and-see approach is appropriate because we have not seen upward

pressures building on inflation, even though we have experienced above trend

growth and a further tightening of labor markets," she said in remarks prepared

for the Economic Club of Minnesota.

     "With the current outlook for the economy remaining positive, monetary

policy settings look appropriate to me," she said.

     The current "benign inflation outlook" gives policymakers an opportunity to

test the degree of slack in the economy and the level of the neutral rate of

interest, she said.

     Few businesses are complaining about too-low inflation, George said, which

leads her to observe that "inflation as experienced by households and businesses

is fundamentally different from inflation as viewed by financial market

participants and many economists."

     Households' short-run expectations for inflation are driven largely by

changes in retail gas prices while their longer-run expectations as measured by

the University of Michigan surveys have been fairly stable, she said.

     What's more, the Fed's point target for inflation as opposed to a range

target has "placed considerable attention on a precise target and has

exaggerated the precision with which monetary policy can achieve this goal," she

said.

     "The current level of inflation may perplex central bankers and financial

market participants, but in the context of a growing economy and job gains, it

doesn't demand a Fed policy response in my view."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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