The head of the Federal Reserve region that includes Oklahoma thinks the Fed may be overreaching in its latest round of bond-buying aimed at boosting the economy and bringing down unemployment.
“I was not in favor of doing more. We have done a lot,” said Esther L. George, president of the Kansas City Federal Reserve Bank. George spoke Tuesday at the bank's Oklahoma City branch. She participates in the Fed's monetary policy-making board meetings, and in January will become a voting member of the Federal Open Market Committee.
The committee last week voted to begin a third round of buying bonds — $40 billion a month — in an effort to boost a sluggish recovery and drive down a stubbornly high unemployment rate. The Fed has kept interest rates near zero and pledged to keep them there for perhaps another two years and has spent more than $2 trillion in two earlier bond-buying ventures known as quantitative easing.
“We've kept interest rates at zero. You can't be more accommodative, I think, in many respects. We've tripled our balance sheet,” George said. “When I look at the economy and think what is it that's holding back demand, what is it that is causing the unemployment rate to stay high, it does not seem like these are factors conducive to more easing.”
She worries the possible risks of further stimulation, including market distortions, misplaced incentives and inflation, outweigh the potential benefits.
“If I thought we had tight policy or somehow credit conditions were tight, then you would weigh that differently,” she said. “You'd say to get credit flowing, cheaper money might be better. In today's setting, I can't see that that's the issue. So adding to it feels to me like compounding the risk.”
Keeping rates low is making it difficult for investors to get low-risk returns, particularly among older consumers who need to generate income, George said. Banks, insurance companies and pension funds also will be more likely to turn to riskier investments to generate needed returns, she said.
The Fed, with its vast and growing portfolio, is vulnerable to losses when interest rates begin to rise, she said. And the Fed's big buys of mortgage-backed securities create fundamental changes in the marketplace, she said.
“I worry about the distortions that it creates in markets,” she said. “Anytime you have the government this involved, you have to think something is not happening right. Right now, at zero interest rate, the markets really aren't pricing risk. They're not really functioning the way they normally would.”
Her biggest long-term concern with the Fed's activities is the potential for igniting inflation.
“I do worry down the road, will we be able to pull back the liquidity before inflation takes off?” George said. “If you look at the times we start pulling rates up, you want to make sure the recovery is on firm footing before you do it. And at times, when we've had to tackle inflation is when we've waited too long to pull back.”
Others opposed move
George is not the only committee member to oppose another round of stimulus. Richmond Fed President Jeffrey Lacker cast the lone dissenting vote in the panel's 11-1 decision, and Dallas Fed President Richard Fisher said he also would have voted against QE3.
George said the slow recovery isn't surprising considering the depths of the recession.
“The research shows us that after a financial crisis, and one of this magnitude, it takes time to repair, to repair household balance sheets, to repair the banking system, to get things back on track. I'm not a believer that you can speed that process up,” she said.
She also questioned whether monetary policy — often called a “blunt instrument” — is the proper tool for dealing with a slow-growing economy.
“Other than setting broad conditions, we can't allocate in a way that would help us fine tune where we want to see improvement in the economy,” she said. “And I worry if the public expects, or thinks that's what we're trying to do, if we think that's what we're trying to do, I think we step outside of what we are supposed to do and can do.”
George receives information from boards that include business leaders from Oklahoma and from the six other states the Kansas City Fed provides oversight for. Businesses, she said, are slow to hire because they're dealing with “paralyzing” political, regulatory and fiscal uncertainty. Consumers, meanwhile, are trying to shed debt while many are coping with employment insecurities, she said.
The Fed, unlike Congress, has the ability to reach consensus and act quickly. That may be part of the problem, she said.
“That is what I worry about,” she said. “Just acting because we can, because we're a deliberative body that can create money and so we should just do that. I think that fails to look ahead and say, “Are we setting, are we creating something that is responsible down the road? Are we thinking long-term about the effects of these actions?”
The 10th Federal Reserve District includes Oklahoma, Kansas, Colorado, Nebraska, Wyoming, western Missouri and northern New Mexico. George said the region's economy is stronger than that of the nation as a whole, mainly due to robust energy and agriculture sectors.
The Federal Open Market Committee holds eight regularly scheduled meetings a year. The committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The committee consists of 12 members — the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. Nonvoting Reserve Bank presidents attend the meetings, participate in discussions, and contribute to the Committee's assessment of the economy and policy options.
Columnist George Will recently published a complimentary column after meeting with Esther George, president of the Kansas City Federal Reserve Bank. He referred to her as “refreshingly retrograde” in her contrarian take on the central bank's attempts to manage the economy. He also suggested that Mitt Romney, who has said he wouldn't reappoint Fed Chairman Ben Bernanke if Romney becomes president, should pick “someone such as George.” When asked about that on Tuesday, she laughed and then ducked the issue, saying, “George Will's a nice guy, but those are somebody else's decisions. Not mine.”