MNI INTERVIEW: Fed Hike Plausible As Early As July - George

The Federal Reserve should consider raising interest rates as early as its next meeting in July, because inflation is too far above target and showing little sign of abating, former Kansas City Fed President Esther George told MNI. 

George said that Fed Chair Kevin Warsh’s approach to communications, which shies away from the kind of forward guidance that requires several months of foreshadowing before any new action on rates, means every meeting will be live. 

“If you were really serious, that this feels too high, and you're not seeing disinflationary signs, July obviously should be on the table,” she said in an interview Monday. “We've all gotten accustomed to a lot of preparation to move and so I think it's a real question, why not July?”

Despite hopes for a resolution to the Iran war, George does not see a retreat in oil prices as enough to restart the process of U.S. disinflation. 

“What does waiting for September buy you here? I understand oil is such a salient price for our inflation expectations. But I just keep looking at inflation – ahead of this war, it was an issue. You get an easing on the oil prices, I’m not sure that’s going to be definitive in terms of a direction for lower inflation,” she said. (See MNI INTERVIEW: Fed's Next Rate Move Likely Upward-Kohn)

50 TO 100BPS

George said the Fed’s three rate cuts of late 2025 were likely premature because they were delivered before the FOMC had gotten inflation sufficiently close to its 2% target, which has been exceeded for over five years.   

That means financial conditions are fairly loose, and would need to be tightened considerably in order to get price pressures back under control, she added. 

“When I hear businesses and I hear households’ expectations, I see examples of them changing to say we're accepting inflation, we feel can pass prices on. That tells me you're probably talking 50 to 100 basis points before you can call that policy restrictive,” said George. 

By keeping rates steady as inflation rises anew, the Fed is in fact passively easing policy, said George. “You can't say rates are near restrictive when they're hovering around the zero to half percent range on a real basis.”

George gave Warsh high marks for sticking to his philosophical priors of not offering too much guidance and pushing for reform during his first press conference. But she added that, over time, the chair will have to give more details on the FOMC’s reaction function. 

“I do think it would be helpful if in future meeting he leaned more into ‘what communication will we offer, and how will we help the public understand the Fed's reaction function or assessment of the economy that stops short of whatever you define as forward guidance,’” she said. 

REGIONAL FEDS

Despite institutional changes she generally views as positive, George was worried by media reports of the chair’s involvement in the selection process for the new Atlanta Fed President. “The Atlanta story was concerning."

Asked if she fears regional Fed presidents losing power in a way that compromises the institutional structure that helps keep the central bank independent, George said: “I always worry about that. It comes from increasing influence from the Board of Governors around those selections. It also comes from the presidents feeling very confident about the role they play.”

She thinks regional presidents for now are giving the new chair the benefit of the doubt, but would need to assert themselves if they feel constrained, she said.

“The Fed has a culture of deference to the chair, a honeymoon period to say, ‘we want to get off on the right foot here, we are open-minded about what changes you want to make,’” she said. “I think as we go forward though, I don’t expect the Fed presidents in particular to change their communication style. They have to get out in their districts.”

George added: “The presidents have to be very clear about the role they play and not lean very much toward a system view, a deference that goes too far. And the boundaries around what the center does are equally important.”