Federal Reserve Bank of Kansas City President Esther George said that policy makers should raise interest rates in the face of surging inflation, though the pace of hikes may need to be deliberate to monitor economic developments during the tightening.
Recognizing risks to the outlook “is not an argument for stalling the removal of accommodation, but it does suggest a steady, deliberate approach for the path of policy could provide space to monitor developments as they unfold,” George said Wednesday in prepared remarks to the Economic Club of New York. “It is clear that removing accommodation is required. How much and how aggressively accommodation should be removed is far more uncertain.”
George, who has been among the more hawkish Fed officials during her tenure, didn’t specify in her prepared comments whether she would like the Federal Open Market Committee to raise rates by a quarter point or by a half point at the next meeting in May. Markets see a better than even chance that the policy committee will raise interest rates by a half point when it next meets May 3-4 to counter inflation at the highest level in four decades.
Fed officials lifted their benchmark lending rate off zero this month with a quarter-point increase. Since then, several policy makers, including Richmond Fed’s Thomas Barkin earlier on Wednesday, have said they are open to hiking by a more aggressive half point at their May meeting. Chair Jerome Powell has said he would favor a bigger move if necessary to bring price pressures under control.
“Given the state of the economy, with inflation at a 40-year high and the unemployment rate near record lows, moving expeditiously to a neutral stance of policy is appropriate,” said George, who votes on the FOMC this year. “At the same time, the factors I noted earlier, including monitoring risks, the responsiveness of activity to interest rate changes, and yield curve developments will be important guides to that pace in my view.”
George said she was concerned by the recent inversion of the Treasury yield curve -- not because it signals a recession as some economists have argued -- but because it raises stability issues for the financial industry.
“My view is that an inverted curve has implications for financial stability with incentives for reach-for-yield behavior,” George said. “An inverted yield curve also pressures traditional bank lending models that rely on net interest margins, or the spread between borrowing short and lending long. Community banks in particular rely on net interest margins to maintain their profitability.”
The Kansas City Fed leader said she sees a soft landing for the economy, with slowing growth and reduced inflation but no recession, as possible but not certain.
“The landscape we face is murky,” she said. “Uncertainty and risks seem likely to accompany each step on the path to policy normalization, demanding equal doses of flexibility and resolve.”
This article was provided by Bloomberg News.