| MADISON, Wisc.
MADISON, Wisc. Jan 9 The Federal Reserve's
decision to dial down its enormous bond-buying program is a
small but positive step toward a more normal interest-rate
environment, a top Fed official who has long opposed the policy
said on Thursday.
But the fact that the Fed continues to buy assets and plans
to keep interest rates near zero for the foreseeable future is
still cause for worry, according to Kansas City Federal Reserve
Bank President Esther George.
"(M)onetary policy is likely to remain highly accommodative
for some time with additional (albeit reduced) asset purchases
under the current program and an extended period of low interest
rates," George said in remarks prepared for delivery to the
Wisconsin Bankers Association. "I remain concerned about the
potential costs and consequences of these untested policies."
The Fed has kept interest rates near zero for more than five
years and has promised to keep them there until well past the
time that unemployment, now at 7 percent, falls another half a
The U.S. central bank has also bought trillions of dollars
of Treasuries and mortgage-backed securities, pushing down
long-term borrowing costs in an effort to spur hiring and
George consistently used her vote on the Fed's
policy-setting panel last year to protest that program, known as
quantitative easing, citing her worries that it could fuel
Last month, citing the improvement in the economy, Fed
Chairman Ben Bernanke led the panel in a decision to pare the
program, to $75 billion a month from $85 billion. He also said
the central bank expects to wind the program down completely by
late 2014, but took pains to assure investors the Fed will be
patient on raising rates.
George voted in support of the move, but on Thursday made
clear she is far from comfortable with the Fed's current stance.
"An extended period of zero interest rates is not conducive
to good banking and encourages a reach for yield," she said.
George said she expects the U.S. economy to grow about 2.5
percent to 3 percent this year, as fiscal headwinds abate and
the job market improves.
While several of her colleagues have worried publicly about
inflation running well below the Fed's 2-percent target, George
said she does not share those concerns, and attributed low
inflation to special factors like lower-than-usual healthcare
costs and low import prices.
George used much of her speech to advocate for policy
changes that could reduce the threat from so-called
"too-big-to-fail" banks, and suggested that one possibility is
to adopt a modern version of the Glass-Steagall Act that
prevented banks from reaching into non-bank businesses.
"In the near-term, timely shifts in monetary policy and
better calibration of regulatory requirements may offer
potential relief to smaller banks," she said, but for the
longer-term, ending too-big-to-fail through policy change is key
to a healthy economy.