Kansas City Federal Reserve Bank President Esther George on Friday made the case for a “sustained policy response” to high inflation, in what will be her final remarks before the Fed’s next rate-setting meeting in two weeks.
“We will have to determine the course of our policy through observation rather than reference to theoretical models or pre-pandemic trends,” George said in remarks prepared for delivery at the Peterson Institute for International Economics, noting that it would be “likely just speculation” to weigh in on how high the Fed’s policy rate will ultimately need to do.
“Given the likely lags in the passthrough of tighter monetary policy to real economic conditions, this argues for steadiness and purposefulness over speed,” she said.
As the Fed has raised rates at its fastest pace since the 1980s to fight the worst bout of inflation since then, George has been a constant voice cautioning against sharp rate hikes that could add to volatility.
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The Fed in two weeks time is expected to choose between delivering a third straight 75 basis point rate hike that would lift the target range for the policy rate to 3%-3.25%, and a smaller half-point hike.
Markets broadly expect the former, and so do many economists, with some noting that Fed Chair Jerome Powell speaking earlier this week did not push back against those market expectations.
George’s remarks signal her support for a slower but perhaps more sustained response to pandemic-driven price pressures.
In her remarks George also called for the Fed to signal clear “resolve” to reduce its balance sheet.
“There may be benefits to announcing the desired reserve levels as the balance sheet shrinks, giving banks time to prepare to operate with significantly fewer reserves,” she said.
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