Federal Reserve Bank of Kansas City President Esther George, who dissented last month against the central bank’s jumbo 75 basis-point increase in interest rates, cautioned that rushing to tighten policy could backfire.
“Communicating the path for interest rates is likely far more consequential than the speed with which we get there,” she said Monday in a speech to the Mid-America Labor/Management Conference in Lake Ozark, Missouri. “Moving interest rates too fast raises the prospect of oversteering.”
George, whose vote at the June meeting of the Federal Open Market Committee was the first dovish dissent of her career, said she understood the desire to raise rates rapidly to dampen surging inflation but was concerned it could do more harm than good.
“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets,” she said.
“Along these lines, I find it remarkable that just four months after beginning to raise rates, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year.”
A majority of Fed officials have said they are open to raising rates by 75 basis points again when they meet July 26-27 and pricing in financial futures markets shows that investors fully expect them to deliver. George, who preferred a 50 basis-point increase in June, didn’t explicitly express openness to a bigger hike on Monday.
But markets also show the benchmark rate peaking around 3.4% in the first half of next year, which is below the Fed’s own forecasts, with a modest cut following before the end of 2023. The rate is currently in a range of 1.5% to 1.75%.
The Fed’s aggressive pivot to confront the hottest inflation in 40 years has roiled financial markets as investors fret it could tip the economy into recession.
“Such projections suggest to me that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust,” George said.
Forecasts updated by officials last month show rates reaching 3.4% by the end of this year and 3.8% by the end of 2023.
George said there was considerable uncertainty about how quickly Fed actions were transmitted to the real economy, citing arguments for why the impact of the pandemic might make it faster — or slower — than in the past.
“Given this range of outcomes, it is unclear just how high rates will need to move in order to bring inflation down,” she said. “These dynamics suggest it will be particularly important to observe how the economy is adapting to changes in monetary policy.”
