EL RENO — Speaking at Redlands Community College on Thursday, Esther George, president and CEO of the Federal Reserve Bank of Kansas City warned about the dangers of “inordinately low” interest rates, and said she believed such continued monetary policy would result in more rapid inflation.
George, one of 12 voting members of the Federal Reserve System's Open Markets Committee, was also critical of the body's continued policy of buying up $85 billion each month in longer-term mortgage and Treasury securities until the outlook for the labor market improves.
“To be clear, I support an accommodative stance of monetary policy while the economy recovers and unemployment remains high,” George said. “But I view the current policies as overly accommodative, causing distortions and posing risks to financial stability and long-term inflation expectations with the potential to compromise future growth. As the Fed's balance sheet continues to expand, the risks and costs increase in my view.”
George became a voting member of the Federal Open Market Committee in January. The committee sets interest rates and other monetary policy. At the body's last two meetings, George cast the lone dissenting vote against sustaining near-zero interest rates until the national unemployment rate reaches 6.5 percent.
The Federal Reserve has moved to keep interest rates low as a response to continued high unemployment rates to speed economic recovery, but continued low interest rates could cause financial imbalances that could cause the still recovering labor market to eventually falter, George said.
“It is critical, however, to ensure we transition from a crisis-type policy stance of aggressive easing to one of accommodation that allows markets, households and businesses to begin to normalize their expectations for interest rates.” she said.
George receives economic information from boards that include business leaders from Oklahoma and the six other states the Kansas City Fed provides oversight for.
Speaking on the national economy, George said she believes the United States will continue its slow but steady recovery.
George said she expected GDP growth this year to be about 2 percent and that the unemployment rate will continue modest declines through the end of the year.
“At this pace, it is certainly less robust than other recoveries, but history does show that recoveries after a financial crisis are often slower,” George said. “Importantly, despite a variety of headwinds during this four-year period, the economy continues to improve in several key aspects.”
First, the pace of job growth has gradually been putting people back to work. The national unemployment rate has declined from its peak of 10 percent in October 2009 to its current level of 7.7 percent, and the private sector payroll has gained an average of 200,000 jobs per month.
“This pace of growth is a positive development in labor market conditions and compares favorably to pre-recession levels,” George said.
Mandated federal spending cuts due to sequestration and tax code adjustments will continue to slow the growth of the economy, she said.
“Uncertainty about fiscal policy and recurring fiscal deadlines, as well as the regulatory environment, is likely to continue the cautious attitude by businesses toward expanding capacity.”