The Fed’s Esther George indicates it’s time for a pause from rate hikes

The Federal Reserve likely will need to pause before implementing further rate hikes as it assesses the economy’s direction and the impact of its previous policy moves, Kansas City Fed President Esther George said Tuesday.

“A pause in the normalization process would give us time to assess if the economy is responding as expected with a slowing of growth to a pace that is sustainable over the longer run,” George said in prepared remarks for a speech in Kansas City. “Failure to recognize these lags could lead to an overtightening of policy, a downturn in economic growth and an undershooting of our inflation objective.”

Echoing recent comments from several other Fed officials, George said policymakers have the time now to be patient in assessing whether further rate hikes are necessary.

Since beginning the current round of rate normalization in December 2015, the Federal Open Market Committee, of which George is a voting member, has approved eight increases, the most recent of which came last month. Her stance is something of a departure from her longstanding reputation as one of the committee’s more hawkish members as she has pushed in the past for the Fed to unwind its historically accommodative policy moves.

Markets have been nervous that the Fed, in its determination to get a neutral rate that is neither restrictive nor stimulative, may be on the way to making a policy mistake.

George said she’s not sure how near the Fed is to neutral, saying only that “we’re getting close.”

The comment contradicts a market-rattling statement from Chairman Jerome Powell in October that the Fed is a “long way from” neutral. Powell has since walked back that statement, in recent weeks saying that the current target rate of 2.25 percent to 2.5 percent is around the lower end of the range of neutral estimates on the FOMC, and more recently also adopting the stance that the Fed can be patient ahead.

“It is possible that some additional rate increases will be appropriate,” George sad. “But making that judgment is not urgent and should depend on a careful look at the data and gathering additional insight into where our destination is, how much further we need to go to reach it and how quickly we should get there.”

The economy, George said, is doing well and she in fact expressed concern that the low unemployment rate, currently at 3.9 percent, could be an inflation signal. George said inflation will be a metric she will watch closely ahead in determining the future policy path.

However, she also noted the lagging impact of Fed policy. In particular, she said it’s unclear how much of an effect decreasing the Fed’s balance sheet is having on financial and economic conditions. The Fed is allowing a capped level of up to $50 billion a month in proceeds from its holdings of Treasurys and mortgage-backed securities to run off.

“It is unclear whether, or how much, this roll off is further removing accommodation,” George said. “Again, this suggests it might be a good time to pause our interest rate normalization, study the incoming evidence and data, and verify our current location.”

George noted that in her district, the farming and energy sectors have both taken a beating. Overall, though, she said the outlook for the economy is “favorable.”