By Alister Bull
KANSAS CITY Jan 10 The Federal Reserve might be
contributing to the next asset price bubble through its
aggressive purchase of bonds to spur U.S. growth, while its
near-zero interest rates could trigger future inflation, a
senior Fed official said on Thursday.
Kansas City Federal Reserve President Esther George, in
remarks that will clearly stamp her as a hawk on the U.S.
central bank's policy-setting committee, went out of her way to
make clear she is not comfortable with recent Fed action.
"A prolonged period of zero interest rates may substantially
increase the risks of future financial imbalances and hamper
attainment of the FOMC's 2 percent inflation goal in the
future," she said.
In particular, she highlighted historically high prices in
bonds, agricultural land and high-yield and leveraged loans for
potential sources of future market instability.
George is a voter on the Federal Open Market Committee this
year, marking the first time she will be voting directly in
policy decisions since she took over at the Kansas City Fed in
"Monetary policy, by contributing to financial imbalances
and instability, can just as easily aggravate unemployment as
heal it," she said.
The Fed voted last month to keep up asset purchases at an
$85 billion monthly pace in an effort to drive down borrowing
costs and spur hiring. It said it would continue this policy of
so-called quantitative easing until it saw a substantial
improvement in the outlook for the labor market.
Subsequent minutes of the Dec. 11-12 meeting showed that
several of the 19 officials who took part in the meeting thought
that the labor market would improve sufficiently to halt bond
buying at some stage this year.
The Fed also pledged last month to hold interest rates near
zero until unemployment falls to 6.5 percent, provided projected
inflation does not rise above 2.5 percent.
George expected the U.S. economy to grow just above a 2
percent in 2013, while unemployment falls around another half
percentage point. The U.S. jobless rate in December was 7.8
Nonetheless, she highlighted a series of risks if the Fed
continues to buy bonds at this rate, indicating little appetite
from her side for a prolonged Fed commitment to this policy.
"These purchases also have their own set of risks and are
not without cost," she said. "At their current level and pace of
growth, I believe they almost certainly increase the risk of
complicating the FOMC's exit strategy."
Fed watchers have not heard much from George since she
became a policy maker. George has limited her remarks to the
national media, but Fed watchers had anticipated she would
follow her predecessor Thomas Hoenig in holding hawkish views.
The speech's emphasis on the costs of the Fed's bond buying
and ultra-accommodative policy also suggests she might be
inclined to dissent at the next policy-meeting on Jan. 29-30.
Fed critics have long argued that its massive asset
purchases, which have tripled the size of its balance sheet to
around $2.8 trillion, and zero rate policy could stoke future
asset bubbles and George aligned herself with those concerns.
"Prices of assets such as bonds, agricultural land, and
high-yield and leveraged loans are at historically high levels.
A sharp correction in asset prices could be destabilizing," she