April 4, 2013 / 5:31 PM / in 5 years

Fed's George, defending dissent, says Fed policy too easy

EL RENO, Oklahoma (Reuters) - Ultra-easy Federal Reserve policy risks financial instability and future inflation, Kansas City Federal Reserve Bank President Esther George warned on Thursday, as she explained her decision to dissent last month at her second Fed meeting in a row.

George also defended her argument that monetary policy risked fanning an asset bubble in farmland prices and the high yield bond market, rejecting recent criticism from a fellow Fed policymaker that this was a matter for regulation.

Noting recent data on the labor market had been encouraging, and the recovery seemed to be on track for a gradual recovery, George said growth remained slow.

“To be clear, I support an accommodative stance of monetary policy while the economy recovers and unemployment remains high,” she told a luncheon audience in this energy production and farming community to the west of Oklahoma City.

“But I view the current policies as overly accommodative, causing distortions and posing risks to financial stability and long-term inflation expectations with the potential to compromise future growth,” she said in prepared remarks.

George, who has dissented at both Fed policy-setting meetings since becoming a voter this year, said her decision was driven by concern that “emergency” Fed action to lift U.S. hiring carried significant risks.

“In raising these issues, it is not my goal to prematurely withdraw support,” said George, who was the lone dissenter at both meetings. “It is critical, however, to ensure we transition from a crisis-type policy stance of aggressive easing to one of accommodation that allows markets, households and businesses to begin to normalize their expectations for interest rates.”

The central bank last month voted to maintain bond purchases at a $85 billion monthly pace while vowing to hold interest rates near zero until unemployment hits 6.5 percent, so long as the outlook for inflation does not rise above 2.5 percent. The U.S. jobless rate in February was 7.7 percent.

“I am concerned that with the adoption of thresholds for inflation and unemployment, the FOMC (Federal Open Market Committee) has expressed some tolerance for having the inflation outlook exceed 2 percent,” George said.


With low unemployment and buoyant energy and commodity markets in its district, which includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and parts of Missouri and New Mexico, the Kansas City Fed has spotlighted high farmland prices as a potential asset bubble, as well as low junk bond yields.

Rapid rises in farm prices, in the past, had been discounted because this had not been accompanied by heavy use of borrowed money, but that trend had changed.

“The sharp rise in lending at the end of last year raises concerns that the wealth effect in agriculture could trigger a leverage cycle similar to past farm booms when farm incomes and asset values faded,” she said.

In contrast, Boston Fed chief Eric Rosengren said last week these potential asset bubbles in agricultural lending, as well as high yield bonds, were best tackled by supervision, rather than easing back on monetary policy to dampen the entire economy. George pushed back hard.

“Asking bank regulators and supervisors, or the newly tasked monitors of financial stability, to single-handedly identify and contain the risks introduced by a highly accommodative monetary policy is not realistic,” she said.


Her audience, made up of local community and business leaders, asked several pointed questions about how the actions of foreign central banks could affect the United States and whether the nation could avoid a currency war.

George, noting the surprise news from the Bank of Japan earlier on Thursday of an aggressive plan to pump money into the economy to raise Japanese growth, declined to answer the question of what that meant for the dollar, but indicated she felt there were limits to what monetary policy could achieve.

“Remember, central banks play a very important role in terms of price stability ... but they do not actually create growth. Central bank are not able to address structural issues, or many of the factors, that can effect how an economy grows,” she said.

Editing by Neil Stempleman

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