Fed’s George Says Rates Should Rise Amid Labor Market Gains

Federal Reserve Bank of Kansas City President Esther George said policy makers shouldn’t wait to raise the main interest rate after continued employment gains because it’s “risky” to continue holding rates near zero.

“We would be wise to act modestly but act now,” George, who will vote next year on the policy-setting Federal Open Market Committee, said in remarks prepared for delivery Thursday in Stillwater, Oklahoma. Protracted low rates may spur investors to take too much risk in seeking returns, she said.

“Starting now to move rates up slowly and deliberately will allow the economy to adjust to a more normal and, in my view, appropriate stance of monetary policy,” George said. “Monetary policy must step back and allow market forces to resume their critical role of pricing risk and allocating capital to its best use.”

Policy makers considering when to raise rates after holding them near zero since December 2008 are weighing continued job gains against a darkening global economic outlook. Minutes of their June meeting released Wednesday show they saw the economy moving toward conditions that would support a rate increase while they also expressed concern about weak consumer spending and risks from China and Greece that have since intensified.

Consumer spending probably will grow at a “healthy rate” in coming quarters due to an improving labor market, rising wealth and lower gasoline prices, George said. The unemployment rate fell to a seven-year low of 5.3 percent in June.

George said labor markets have made considerable progress and that the relatively steady inflation rate is “encouraging.” The first-quarter slowdown in economic growth “reflected some temporary factors” that are unlikely to persist, she said.