Fed’s George Urges Higher Rates to Avert Asset-Price Bubblesby
Kansas City Fed chief has dissented in 2016 to favor rate hike
Fed has limited ability to affect labor market, George says
Federal Reserve Bank of Kansas City President Esther George urged the U.S. central bank to increase its target interest rate to counter possible asset-price bubbles.
“I view the current level as too low for today’s economic conditions,” George said in a speech on Thursday in Albuquerque, New Mexico, according to prepared remarks. “Interest-sensitive sectors can take on too much debt in response to low rates and grow quickly, then unwind in ways that are disruptive.”
The rate-setting Federal Open Market Committee is weighing how soon to raise rates a second time following the first hike in almost a decade from near zero in December. Fed officials, including Atlanta bank chief Dennis Lockhart and San Francisco’s John Williams both, have said another increase could be warranted at the next FOMC meeting in June.
“Because monetary policy has a powerful effect on financial conditions, it can give rise to imbalances or capital mis-allocation that negatively affects longer-run growth,” George said. “Accordingly, I favor taking additional steps in the normalization process.”
Markets have been more skeptical about the Fed’s plans, and don’t expect another increase until December. The median projection of FOMC members submitted at the March meeting called for two quarter-point increases in 2016.
George, who has consistently been among the most hawkish Fed officials, has dissented at the past two meetings, preferring a quarter-point rate increase.
George said she viewed the U.S. labor market as “at or near full employment” with inflation “close to the FOMC’s target of 2 percent.”
While Americans may be dissatisfied with low wage growth, much of that may reflect longer-term structural issues such as a decline in middle-income jobs, George said. Monetary policy is “limited in its ability to affect trends like job polarization,” she said.
George said she wasn’t overly concerned by weak first quarter growth, with expansion of nearly 2 percent over the past year close to the average during the expansion.