FED’S GEORGE: TOO SOON TO THINK OF ADJUSTING MONETARY POLICY; MUST ‘WAIT AND SEE’

–Fed Won’t Hike Funds Rate If Inflation Goes Over 2%

–Would Have To Decide How To React if Inflation Rises in ‘Unanticipated Ways’

By Steven K. Beckner

(MaceNews) – Kansas City Fed President George said Tuesday that monetary policy needs to “remain accommodative for some time” and said it’s “too soon to speculate about the timing of any change in this stance.”

George said the Fed would not raise interest rates if inflation goes above 2%, but suggested it might have to “react” if inflation were to rise in “unanticipated ways.”

George, in a zoom meeting with the Kansas City Central Exchange, said a “wait-and-see approach will guide the trajectory of monetary policy” and added, “As the data come in, and the economy evolves, the public and markets should be able to adjust their expectations regarding the policy path.”

George said “this feature of forward guidance is especially useful now given the heightened uncertainty around the outlook, stemming in large part from the path of the virus.”

Although the near-term risks are “predominately negative,” she said “once the pandemic is behind us, there is considerable scope for a snap back in activity.”

George said the FOMC will have to “wrestle with judgments about the appropriate stance of its policy settings.”

For example, she warned, “To the extent that a post-vaccine bounce-back boosts demand and prices in these sectors, including airfares and hotel accommodation, inflation could move up quickly. … Such a scenario does not suggest higher inflation is a near-term threat, but rather that inflation could approach the Committee’s average inflation objective more quickly than some might expect.”

Asked about the Fed’s ability to rein in inflation if it should accelerate, she said, “the Federal Reserve… is quite able to rein in inflation.”

“The Federal Reserve’s policy tools around interest rates, around its balance sheet, we can begin to pull back accommodation from the economy to discourage inflation,” she continued.

Noting that “high inflation is costly,” George said, “we also know how to affect that.”

She said “the questions are always around at what point and how much.”

“If inflation tips over 2% I don’t think you’re going to find the Federal reserve reacting to that,” she said, but “if inflation takes off in ways that are unanticipated, that of course require some decisions to react to that.”

Asked about the weakness of the dollar, George deferred to the U.S. Treasury, but acknowledged, “there’s a lot of attention on the U.S. dollar.”

“My observation is that currencies have reacted to the policy environment and the economic conditions in their countries,” she continued. “And so you might imagine that at a time when there is highly accommodative monetary policy — and you see this happening with central banks around the world – it will affect currency values, it will affect trade, it affects many aspects of our economy.”

“So I think fundamentally where I focus is what are the policy objectives of the Fed that can cause the economy to perform in a way that leads to growth,” she went on. “And it is essentially, at the end of the day, having growth that is sustainable in the long run that really will demonstrate where the strength of an economy is. So that’s where I keep my focus.”

In her prepared remarks, George warned of potential risks to financial stability if the Fed keeps rates too low too long: “will highly accommodative monetary policy seed imbalances in the economy that increase the fragility of the economy to the next inevitable shock? Will other mechanisms effectively mitigate and balance any destabilizing elements of a low-for-long rate environment?”

Following up in her Q&A following the Zoom meeting, George  said the Fed’s mandate is maximum employment and stable prices, but said the Fed “must be vigilant” against financial risk-taking and “vulnerabilities” that could interfere with that dual mandate.

When asked about the burgeoning federal debt, George conceded the U.S. debt-to-GDP ratio is high, but said, “The focus right now is short-term. I think it should be short-term until we see a recovery fully take hold and we can get back to a sustainable growth trend in the country, but certainly policymakers outside the Federal Reserve will have to turn their attention to those issues at some point.”

Earlier, Cleveland Fed President Loretta Mester stressed the need for policy flexibility, given uncertainties and “both upside and downside risks.”

“This is why framing our forward policy guidance in terms of the progress the economy is making toward our policy goals of maximum employment and price stability is so important,” she said during another online event, hosted by the European Economics and Financial Centre in London.

“The economy could evolve in a materially different way than expected and risks, including those to financial stability, might emerge that could impede attainment of our monetary policy goals. …. There is also the possibility that the post-vaccination recovery could be stronger than expected.”

Mester also emphasized the Fed’s willingness to tolerate higher inflation and the need to get inflation expectations up.

Because “resource slack in the labor market and in product markets has become less correlated with actual inflation” and because “inflation expectations now play a larger role in determining inflation outcomes,” she said it has become “even more important that inflation expectations remain well anchored at levels consistent with our longer-run 2 percent inflation goal.”

So, Mester said, “not only will we be comfortable with serendipitous shocks that move inflation above 2 percent, but we will set policy to intentionally move inflation moderately above 2 percent for some time.” This implies that “monetary policy will be somewhat more accommodative than in the past when inflation has been running persistently low in order to reach our longer-run inflation goal.”

Meanwhile, Boston Fed President Eric Rosengren mixed cautious optimism about economic growth and employment with pessimism about inflation Tuesday and said monetary policy needs to stay “very accommodative.”

Rosengren said he’s “optimistic that we will see significant employment gains over the next two years,” but said, “I do not expect the U.S. economy to reach a sustained 2 percent inflation rate over the same time frame,” which “implies that policymakers will continue to maintain very accommodative short-term rates.”

Despite the pandemic’s drag on growth, Rosengren said, “with substantial fiscal and monetary support, I expect a robust recovery starting in the second half of this year.”

But he added, “I also expect that short-term interest rates near zero will be appropriate throughout this year, and that the Federal Reserve will continue to purchase long-term assets until the economy is on a stronger economic footing.”

None of these three Fed presidents are voting on the Fed’s rate-setting Federal Open Market Committee this year.

Contact this reporter: steve@macenews.com.

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