Fed’s George Says Years of Stimulus Risk Future Instability

Federal Reserve Bank of Kansas City President Esther George said the central bank’s record stimulus for more than four years may create financial instability that could hurt employment over time.

“We should not underestimate the risk of an extended period of zero interest rates and the accompanying incentives that may lead to future financial imbalances,” George said today in remarks prepared for delivery in El Reno, Oklahoma. “Such imbalances could unwind in a disruptive manner and cause the labor market recovery to stumble.”

George’s comments reflect her dissents this year in her first votes as a Federal Open Market Committee member. Since becoming the leader of the Kansas City Fed in October 2011, the former bank regulator has expressed worry that excessive central bank stimulus may be creating financial imbalances or could raise inflation expectations.

“I support an accommodative stance of monetary policy while the economy recovers and unemployment remains high,” George said at Redlands Community College. “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.” In response to a question, George said “I believe that we will have the tools” to deal with inflationary pressures. “Part of the judgment is when, then how quickly, you have to respond and

what the effects will be.”

Bank Supervision

While Chairman Ben S. Bernanke has advocated using regulation to address any financial instability, George said in her speech that it was “not realistic” to expect that banking supervisors could “single-handedly identify and contain the risks.”

Elaborating in response to a question, she said “we should not become too confident” that regulatory tools “don’t have to work in conjunction with monetary policy.”

“My interest in being realistic is about the connection between monetary policy and supervision, and how they have to work together,” she said.

The Kansas City Fed leader said she expects growth this year of about 2 percent, and that unemployment will continue “to decline modestly.” Consumer spending has held up and confidence has rebounded in part because of a recovery in the housing sector, she said.

Lockhart, Evans

Her colleagues this week said the policy group should press on with asset purchases. Atlanta Fed President Dennis Lockhart said today that U.S. growth may not exceed the modest growth of the past few years, while Chicago Fed President Charles Evans said he would like to see payrolls rise with “200,000 a month increases for like six months” before curtailing purchases.

Employers added 190,000 jobs in March, according to the Bloomberg survey median before Labor Department data is released tomorrow. Unemployment probably held at 7.7 percent.

Consumer prices rose just 1.3 percent in February from a year earlier, according to an inflation gauge favored by the Fed, and growth has been too weak to generate jobs for millions of fired workers.

George was the Kansas City Fed’s No. 2 official under Thomas Hoenig, who retired and was named vice chairman of the Federal Deposit Insurance Corp. She joined the Fed in 1982 and spent much of her career in bank supervision. The Kansas City district represents Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and the western third of Missouri.

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