While supporting the Federal Open Market Committee's decision to cut asset purchased by $10 billion a month, Federal Reserve Bank of Kansas City President and Chief Executive Officer Esther L. George called it a "modest" but "important" step toward normalization.
The slowing of the pace of purchases to $75 billion from $85 billion is an "essential positive development for the economy and the banking industry," George told the Wisconsin Bankers Association, according to prepared text of her remarks, released by the Fed. "Even so, monetary 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. I remain concerned about the potential costs and consequences of these untested policies."
A slow steady recovery was held back by "obstacles," including fiscal policy, which has since "eased," she said. "Beyond these fiscal issues, however, and more importantly because consumer spending accounts for more than two-thirds of the economy, is the fundamental strengthening in private demand. Better labor markets, stronger household balance sheets, and income growth have fostered this improvement. Real disposable income growth and average hourly earnings in the private sector have been trending higher. Employment growth, too, has been gaining strength, as nearly every major sector has higher employment compared to a year ago. In fact, government is the only major sector to have shed jobs over the past year, but even that trend has shown signs of reversing. Combined, net job creation is close to its fastest pace since the end of the crisis."
Unless "an unexpected shock or a downturn in global growth" occurs, George expects growth between 2.5% and 3% in 2014, "reflecting the combination of less fiscal drag, healthier household balance sheets and improving labor markets-one of the better years in some time."
Inflation will remain below the Fed's 2% target, but George is not afraid of deflation "because several special factors appear to be weighing on inflation measures, such as lower-than-usual healthcare costs, changes in how the price of some financial services are calculated, and low import prices."
George also pushed for the end of too big to fail, since "ending TBTF and its related advantages will serve to enhance the viability of community banks and restore public confidence. I am hopeful that policymakers will continue to vigorously pursue this important objective."
