Fed's George Says It's Important to Press Forward With Rate Increases

02/08/18 09:28 PM EST
By Michael S. Derby 

The arrival of a surge of stimulative government spending and taxation policies at a time when the economy was already humming along increases the importance of pressing forward with interest rate increases, Federal Reserve Bank of Kansas City President Esther George said Thursday.

Because of this "uncertain" amount of fiscal stimulus, it is "important" that the Fed continue "on its current path of policy normalization, with gradual increases in the target federal-funds rate," Ms. George said. She noted that the Federal Open Market Committee outlook is currently eyeing about three rate rises this year and a similar amount in 2019, and said "this is a reasonable baseline unless the outlook changes materially."

Rate rises are important to "sustain the expansion without pushing the economy beyond its capacity limits and creating inflationary pressures," the official said.

Ms. George, who is not currently a voting member of the FOMC, has long favored rate rises and shown more appetite for tighter monetary policy, in an environment where job gains have been strong, even as inflation has been persistently under the central bank's 2% inflation target.

Her remarks Thursday, which came from a text of a speech to be given in Wichita, Kan., came amid considerable market upheaval. Stock prices have been suffering huge volatility and falling prices, as longer-term bond yields have risen.

In a television appearance earlier Thursday, New York Fed leader William Dudley called the stock market losses "small potatoes" so far and said the tumult hasn't changed the outlook for the Fed. He said the market's woes are in part showing a recognition that the ultralow rates of the financial crisis era are finally starting to go away, and market participants are repricing their holdings accordingly.

The market troubles come in the wake of a tax bill that Fed officials think will add modest near term lift the economy, at the price of bigger deficits down the road. Government borrowing is already picking up, and that stimulus is arriving at a time where it could cause a strong economy to become an overheated one. If that happened it could force the Fed to be even more aggressive with rate rises.

"I expect that lower personal tax rates will boost aggregate demand, and that a lower corporate tax rate and the more favorable tax treatment of investment spending will increase aggregate supply, although it is difficult to predict exactly how and when consumers and businesses will respond," Ms. George said.

The veteran central banker was upbeat about the economy's path.

"The good news is that the U.S. economy is currently growing at a moderate pace, with full employment and price stability," Ms. George said. She added it should be surprising if job gains moderate given the long-running success of the labor sector.

And when it comes to price pressures, she said "year-over-year inflation is currently running just under the Federal Reserve's objective of 2%, although I expect it will begin to rise as labor markets tighten further and global demand pushes up import prices."

Write to Michael S. Derby at michael.derby@wsj.com

 

(END) Dow Jones Newswires

February 08, 2018 21:28 ET (02:28 GMT)

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