Jan 31 The Federal Reserve's decision to ratchet
down its massive bond-buying program was a "modest but positive
step," a top Fed official said on Friday, but continued
super-easy monetary policies pose risks both at home and abroad.
"I remain concerned that continuation of these policies
could have significant long-term costs," Kansas City Federal
Reserve President Esther George said at a Basel
Committee/Financial Stability Institute high-level meeting in
Cape Town, South Africa, according to written remarks released
by the regional Fed bank.
Already, she said, there are signs that banks are "chasing
yields," building up risky bets that could threaten financial
stability longer term, she said. And the destabilizing effects
of super-easy policies are not confined to the countries, like
the United States, that pursue them, she said.
"Such policies can influence other countries by distorting
their exchange rates and balance of payment positions, capital
flows and rates of credit expansion," she said.
George has been a stalwart opponent of the Fed's bond-buying
program. Last year she consistently cast her vote against the
Fed's policy on this until the final meeting in December when
the U.S. central bank decided to begin winding it down.
Although George has no vote this year - regional Fed bankers
pass the balloting baton on monetary policy each January - she
is not alone in warning against unseen and negative side effects
of the Fed's unprecedented policies.
The Fed's bond purchases, aimed at pushing down borrowing
costs and boosting investment and hiring, have swollen the Fed's
balance sheet to $4 trillion.
The Fed has also kept benchmark interest rates near zero for
more than five years and has promised to keep them there until
well past the time that the U.S. unemployment rate, now at 6.7
percent, falls to 6.5 percent, so long as inflation remains in
On Wednesday, it took another step toward ending its
bond-buying program by cutting purchases to $65 billion monthly,
despite recent turmoil in emerging markets that some had
speculated would prompt the Fed to put its wind-down on hold.
But the program still adds considerable stimulus to the U.S.
economy, and is risky, George said.
"As central banks undertake unprecedented actions to alter
rates and prices in financial markets, we should not be
surprised to find unintended, negative side effects," George
said on Friday. Sharp rises in U.S. stocks and farmland
prices could be signs of asset bubbles, she suggested.
To counteract the negative effects of easy policy, George
urged stronger supervisory action, including strengthening bank
capital through higher leverage ratios.
Restrictions like the controversial 'Volcker rule' in the
United States, which limits proprietary trading by banks, also
offer a potential solution, along with careful oversight of
banks to detect problems such as lax lending standards and poor
governance before they balloon.
"To the extent similar weaknesses emerge as an outgrowth of
current monetary policies and risk appetites, strong examination
processes are a critical element in flagging such risks at the
firm level," George said. "However, limiting the conditions or
incentives for risk-taking and their broader effects on
financial stability must be recognized as beyond the scope of