MNI INTERVIEW: Fed On Hold For At Least Next Few Months-George

The Federal Reserve is likely to keep interest rates steady in coming months because growth prospects look strong and inflation remains significantly above target, former Kansas City Fed President Esther George told MNI. 

“If you think about what's coming in the first and second quarter, my sense of this year, it looks to me like more tailwinds than headwinds,” said George in an interview Thursday, a day after the FOMC kept rates on hold for the first time since July.

“You hear people talking about the fiscal situation. I agree with that. I think that's going to be easier. You've got easy financial conditions. We’ve got 75 basis points of further easing coming through that pipeline,” she said.  “All said it's a way for them to stop. If you think about their next few meetings, which coincide with Powell’s final meeting as Fed chair, it would seem like that's not waiting too long to see the effects of those things.”

George thinks the Fed has become too sanguine about inflation given that key measures have been above target for more than four years.  (See MNI INTERVIEW: Fed In Watch Mode Through H1, Lockhart Says)

TWO-SIDED RISK

For that reason, she is skeptical of the Fed’s ongoing easing bias, with the December Summary of Economic Projections showing a median of one more cut this year and another next year. She said the central bank needs to introduce more “two-sided risk” in policy, despite Powell’s press conference reassurance that no FOMC member currently thinks the next move will be a rate hike. 

“You have upside risk to inflation and a target you haven't pinned down yet. I don't want to take anything away from their assessment of the labor market, but the truth is you've got a lot of supply things going on at the same time that firms are going slow on hiring,” said George, adding that she thinks policy is now somewhat accommodative. 

“I don't know that today you'd say it looks like a hike is coming, but you certainly would say under these conditions, we might have to lean one way more than we would the other. The chair has been leaning more dovish and looking more closely at the labor market than inflation, because you will hear them say they just have a stronger sense that disinflation is coming. I'm not as convinced.”

George said Powell’s upcoming replacement as chair would likely face pushback from the rest of the committee if they tried to force the kind of aggressive rate cuts President Donald Trump has repeatedly demanded. 

“Your credibility is everything. You have a large committee where you have to build consensus, and that consensus comes as much from the listening side to the voices around the table,” said George. 

“That's true in any organization, it will be particularly true in the Federal Reserve, the need to bring this group along to whatever views you have, and that's going to be really important. Just to come in and say, ‘I'm now in charge, we’ll do it this way’ is going to be difficult, at least under the current construct of how the committee works.”

BALANCE SHEET

She expressed concern about the Fed’s rapid return to balance sheet expansion after the end of QT despite reassurance from officials that the move is unrelated to monetary policy. 

“These reserve management purchases, the USD40 billion a month, I understand the intent is quite different from QE, but the mechanics are not. So when you're in the market buying USD40 billion a month – and again, we'll see how long that lasts – but that certainly is putting money in the economy through the banking system,” said George.