– Be ‘Patient’ For Now, But Must ‘Reconsider’ Policy Settings as Virus Fog Clears
– Not Worried About Rising Yields, Breakevens Now, But Watch Wages, Prices
By Steven K. Beckner
(MaceNews) – Kansas City Federal Reserve Bank President Esther George said Thursday that, for now, the Fed needs to be “patient” in maintaining an accommodative monetary policy, but said the Fed must be alert to the eventual need to make it less so.
George, not a member of the Fed’s policy-making Federal Open Market Committee this year, is known as one of the more hawkish Fed Presidents, but her comments to a Farm Journal Top Producer Summit showed no current inclination to tighten credit.
“(T)he FOMC is positioned to be patient as it follows the outlook for the virus and the economy,” she said in prepared remarks. “Certainly, it is too early to discuss pulling back on accommodation given continue elevated unemployment, below-target inflation, and the uncertainties surrounding the outlook ..…”
She sounded unfazed by recent rises in bond yields and TIPs breakeven measures of inflation expectations.
“(T)he notable recent rise in longer-term interest rates does not in my view warrant a monetary policy response for several reasons,” she said, noting that “most of the rise in the ten-year Treasury this year appears to reflect an increase in the real yield, that is the interest rate controlling for inflation compensation.”
“Much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign of increasing growth expectations,” she continued. “If this is indeed the reason that yields are increasing, they are unlikely to rise to the point of smothering the optimism that led to their increase in the first place, and measures of real yields remain deeply negative and only a touch off all-time lows.”
George added that “the recent increase in inflation compensation is a promising signal that markets take seriously the Fed’s commitment to stabilize inflation expectations near its 2 percent objective.”
However, she indicated she wants to start normalizing monetary policy whenever the economy shows clear evidence of getting back to normal from the pandemic.
George said the inflation picture is presently “muddled” and “disparate” but said, “it is also worth recognizing that overall inflation could firm up quickly post vaccination as demand for hard-hit sectors recovers……”
“Monitoring these price signals and progress on employment will remain essential even as the FOMC takes a patient approach to monetary policy,” she said. “Once the fog of the uncertainties currently obscuring the outlook clears, those policy settings will necessarily be reconsidered.”
Responding to questions, George said she and her FOMC colleagues must ascertain whether upsurges in oil and other prices are “transitory” or “are they representing momentum that will continue.”
The spike in oil prices is “not something you’d see the Fed reacting to immediately,” she went on, but she added, “we don’t dismiss it .… We will keep an eye on it.”
George said there are other price pressures and said the FOMC’s “challenge is not to downplay inflation but to understand what is its momentum and its persistence.”
She added she will be “closely” watching wages.
“Once companies expect that they will have to raise wages to attract the workers they need, that can set in motion the kind of price increases that they will have to pass on to consumers,” she said. “So it’s certainly something to keep an eye on.”