George Says Fed Sale of Assets May Disrupt Markets

Kansas City Federal Reserve Bank President Esther George said the central bank may trigger instability in financial markets when it eventually begins to sell assets from its record balance sheet.

The Fed’s current plan for selling securities “could be potentially disruptive to markets and market functioning,” George said today in a speech at the University of Nebraska-Omaha. “These actions are untested by the Federal Reserve and could cause an unwelcome rise in mortgage interest rates.”

George dissented last month during her first meeting as a voting member of the Federal Open Market Committee, opposing a decision to press on with $85 billion in monthly bond purchases aimed at spurring growth and reducing unemployment. The buying has pushed the Fed balance sheet to $3.02 trillion.

The Kansas City Fed president voiced concern that “the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations,” according to the FOMC’s Jan. 30 statement.

“While I have agreed with keeping rates low to support this recovery, I also know that keeping rates near zero has its own set of consequences,” she said today.

Monetary easing can go too far in encouraging investors to take on more risk, she said.

‘Healthy Shift’

“Having spent a fair part of my Fed career examining banks, I know it’s very difficult to identify the point where a healthy shift toward risk becomes excessive and potentially damaging,” said George, former head of bank supervision at the Kansas City Fed.

The central bank’s current policy also “carries with it the risk that longer-term inflation expectations may slip above levels consistent with the committee’s 2 percent goal,” she said.

“Standard measures of inflation look to be low, look to be manageable over the medium term,” George said. Yet “in certain asset classes we’re beginning to see price issues.”

George said in a speech last month in Kansas City that prices “of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels” and may signal market imbalances.

U.S. stocks were little changed today as investors watched corporate earnings before President Barack Obama’s State of the Union address. The Standard & Poor’s 500 Index gained 0.3 percent to 1,521.49 at 1:25 p.m. in New York. The index is up 6.7 percent this year.

George became president of the Kansas City Fed in October 2011, succeeding Thomas Hoenig who retired and was later named vice chairman of the Federal Deposit Insurance Corp. George was the Kansas City Fed’s No. 2 official under Hoenig. She joined the Fed in 1982.

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