The Federal Reserve should consider slowing down to “steady and deliberate” interest-rate increases, said Kansa City Fed President Esther George on Thursday.
“A more measured approach to rate increases may be particularly useful as policymakers judge the economy’s response to higher rates,” George said, in a speech to a conference on energy and the economy sponsored with the Dallas Fed.
The Fed has raised its benchmark rate by the fastest pace since 1980 – moving from close to zero to a range of 3.75%-4%.
At the same time, the central bank is allowing $95 billion in Treasurys and mortgage-backed securities to roll off its balance sheet.
George said the speed at which rates have increased has likely contributed to the “marked” increase the market’s uncertainty about the path of Fed policy.
“As the tightening cycle continues, now is a particularly important time to avoid unduly contributing to financial market volatility, especially as volatility stresses market liquidity with the potential to complicate balance sheet run-off plans,” she said.
Despite these moves, imbalances in the economy and the labor market persist, suggesting the Fed must continue to tighten, George said.
How far and how quickly will interest rates have to rise?
Some argue that rates need to get above the expected inflation rate. With consumers expecting inflation to run at about 5% over the next year, this measure would point to higher rates.
George said that consumers have large holdings of liquid savings. Whether these savings are spent or saved will be important for shaping the outlook, she said.
“It could very well require a higher interest rate for some time to convince households to hold onto this saving rather than to spend it down and add to the inflationary impulse,” she said.
George said the pace of hikes is less important than “the strength and communication” of the Fed’s commitment to return inflation to the 2% target.
“Without question, monetary policy must respond decisively to high inflation to avoid embedding expectations of future inflation. In my view, a steadfast commitment to returning inflation to the FOMC’s target is important. So is the pace of rate increases,” George said.
Stocks
DJIA,
SPX,
were sharply higher in the wake of the softer-than-expected consumer inflation report. The yield on the 10-year Treasury note
TMUBMUSD10Y,
sank to 3.86%.
