MNI POLICY: Fed's George Signals Support for Rates Pause

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Kansas City President Esther

George on Tuesday signaled her support for a pause in interest rate increases,

saying rates are approaching a neutral setting and there is no urgency to make

another move. 

     George had long been an outspoken advocate for higher interest rates on the

FOMC but her remarks Tuesday marked a change of tone, suggesting overwhelming

support among officials for a breather in their tightening campaign. 

     "This year we must acknowledge that rates are approaching, and may be

closing in on, our destination of neutral," she said in a speech prepared for

The Central Exchange in Kansas City, Mo. 

     "We are close and for now, it seems to me that we should proceed with

caution and be patient as we approach our destination," she said. 

     Benign inflation despite tight labor markets, as well as a raft of downside

risks, call for patience and for the Fed to remove its guidance that "some

further rate increases" are likely needed from its policy statement, George

said. 

     Financial market conditions have tightened and become more volatile, and

the dollar has strengthened. Business are uncertain about trade policy and

global growth prospects, she said. 

     A pause would also give the Fed time to assess if the economy is responding

as expected to past rate hikes with growth slowing to a sustainable pace. The

Fed needs to be "sharply aware that the effects of past rate increases, while

dissipating, are still in play and the effects will need to be watched

carefully," she added. 

     "If, for example, the inflation outlook remains benign despite tight labor

markets or if the downside risks I spoke of earlier materialize, we can pause

the normalization process," George said. "On the other hand, if inflation

pressures emerge, it would suggest we are further away from neutral than we may

have previously thought and further interest rate increases could be necessary."

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

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