Fed’s Esther George Says Job Gains Warrant Tapering Bond Buying
Federal Reserve Bank of Kansas City president Esther George, who has repeatedly dissented against adding stimulus, said labor-market gains warrant tapering the Fed’s bond purchases immediately and halting buying by mid-2014.
“Recognizing that there has been clear, ongoing improvement in the labor market and other parts of the economy is not to suggest the end of accommodative policy, but instead acknowledges that it is time to move away from using policy tools that were appropriate during the financial crisis and begin the long process of adjusting policy to more normal conditions,” she said in a speech in Denver.
George has voted this year against all six decisions by the Federal Open Market Committee to press on with $85 billion in monthly bond buying, saying the program risks creating imbalances in the economy and financial markets and pushing up long-term inflation expectations. She disagreed with the view of the majority that recent reports that indicate a slower recovery justified continuing bond purchases at the current level.
“Delaying action not only allows potential costs to grow, it also has the potential to threaten the credibility and the predictability of future monetary policy actions,” George said. “Policy moves that surprise the market often result in additional volatility.”
The Kansas City Fed official said she agreed with Fed chairman Ben Bernanke’s timetable laid out in June, “which called for the pace of purchases to moderate this year and gradually decline for several months until they come to an end around mid-2014.”
Fed stimulus has prompted investors to search for higher yields and take greater risks, George said in response to audience questions. Individual investors who rely on safe investments, as well as insurers and pension funds, have “increased duration” among their bonds holdings, she said.
“The other area where you see some excess is the leveraged lending market,” and that “bears watching,” along with the price of farmland, George said.
“In the face of declining commodities prices, you would expect to see some of those values begin to come down,” she said, referring to agricultural land. “In fact, we continue to see double-digit increases” in real estate prices.
George called for the FOMC to clarify its plans for the benchmark interest rate, which the Fed has held at just above zero since December 2008.
“Beyond the communication challenges associated with asset purchases, explaining the committee’s interest-rate policy and how long rates will remain near zero will be a crucial next step,” she said in her speech.
Since the FOMC meeting, Fed officials have voiced differing viewpoints, with Dallas’ Richard Fisher agreeing with George the FOMC was risking its credibility by not tapering when it had primed the markets for such a move.
Federal Reserve Bank of Minneapolis president Narayana Kocherlakota, a voter on policy next year, said earlier today that the Fed must do “whatever it takes” to strengthen a job market that is healing too slowly.
New York Fed president William Dudley said Sept. 23 the central bank must “forcefully” push against headwinds in an economy that “still needs the support of a very accommodative monetary policy.”
Fed Gov. Jeremy Stein said today in Frankfurt the central bank should press on with accommodation while linking the wind-down of its bond purchases to economic data such as the jobless rate.
Most economists surveyed by Bloomberg News said the Fed will wait until December to take a first step, according to a poll taken Sept. 18-19.