Balanced risks support gradual normalization, George says

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With upside and downside risks balanced, Federal Reserve Bank of Kansas City President Esther George said Thursday, gradual rate hikes remain appropriate.

“This gradual normalization of policy seems appropriate to me given that the FOMC’s employment and inflation objectives have largely been achieved while the current setting of its overnight interest rate target remains below estimates of its longer-run value,” she said in a speech in Tulsa, Okla., according to prepared text released by the Fed.

While the Federal Open Market Committee works to move monetary policy toward a neutral level — on that neither stimulates nor restrains economic growth — several “risks and uncertainties” remain.

“On the upside, accommodative financial conditions, elevated consumer confidence and expansionary fiscal policy could lead to further increases in economic growth and inflation,” she said. “On the downside, trade policy uncertainty, growing risks in emerging market economies and policy divergence between the U.S. and other advanced economies could slow down both foreign and U.S. growth.”

However, George said, she believes these risks are balanced. Additionally, she noted, monetary policy needs to be dictated by incoming data.

The FOMC has tried to “thread this needle” by slowly raising the target federal funds rate and reducing its balance sheet. “This means policymakers will need to carefully assess the effects past policy actions are likely to have as they look for economic fundamentals to remain consistent with the objectives of maximum employment and price stability,” George said.

Going forward, it’s reasonable to “expect continued moderate growth, with a gradual slowing to more sustainable growth rates of both output and employment,” she noted. “This outlook will likely require further gradual increases in the FOMC’s target interest rate, although the pace and extent of future actions remain a key aspect of the Committee’s deliberations.”

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Monetary policy Esther George Federal Reserve Federal Reserve Bank of Kansas City FOMC