George Says Fed Eroded Credibility by Not Tapering Bond BuysJoshua Zumbrun
Federal Reserve Bank of Kansas City President Esther George, who has consistently dissented against additional stimulus, said the central bank missed an opportunity to begin reducing bond purchases because markets were primed for such a move.
“Costly steps had been taken to begin to prepare markets for an adjustment in the pace of asset purchases,” George said today in a New York speech to the Shadow Open Market Committee, a group of economists that critiques Fed policy. “This week’s decision by the Fed to taper expectations and not bond buying surprised many, disappointed some like me.”
George has voted this year against all six decisions by the Federal Open Market Committee to press on with bond buying, saying the program risks creating imbalances in the economy and financial markets and pushing up long-term inflation expectations.
“Signaling future policy and then failing to follow through could erode the policy intent,” George said. “Asking the markets to trust forward guidance is going to require a great deal of credibility,” she said, referring to the Fed’s strategy to guide expectations about future bond purchases and interest-rate increases.
In addition to buying $40 billion a month in mortgage debt and $45 billion a month in Treasuries, the Fed has pledged to hold its target interest rate near zero at least as long as the unemployment rate is above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
“Communication from the FOMC had reinforced the expectations of an adjustment,” George said. “It was my sense at this meeting that moving now and moving slowly would not eliminate volatility in the markets, but could give the markets space to begin adjusting gradually.”
In a speech earlier this month in Omaha, Nebraska, George called for tapering the Fed’s $85 billion in monthly bond buying at its Sept. 17-18 meeting while cautioning that such reductions may prompt market volatility.
“An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month,” George said in that speech. Future purchases could be “split evenly between” Treasuries and mortgage-backed securities.
Chairman Ben S. Bernanke and his colleagues delayed the beginning of their strategy to trim asset purchases at a meeting this week in Washington. The Fed pressed on with the program to bring about a substantial improvement in the labor market.
“Clearly the actions at this meeting, and the expectations that had been set relative to how markets were thinking about this, created confusion, created a disconnect,” she said.
The Standard & Poor’s 500 Index climbed to the highest level on record following the Fed’s decision to postpone tapering. The S&P 500 closed Sept. 18 at 1,712.52. The index has fallen the past two days and was trading at 1,713.00 at 2:03 p.m. in New York.
George, 55, became chief of the Kansas City Fed in 2011 and was previously the district bank’s No. 2 official under Thomas Hoenig, now vice chairman of the Federal Deposit Insurance Corp. She joined the Kansas City Fed in 1982 and spent much of her career in bank supervision.