In order to prevent the economy from overheating, the federal funds rate target must be raised slowly, Federal Reserve Bank of Kansas City President Esther George said Friday in explaining why she has pushed for a 25 basis point increase.
"My view is that monetary policy should avoid deliberately stoking the risks that come with overheating the U.S. economy and instead, slowly raise the federal funds rate to promote maximum employment commensurate with the economy's long-run potential to increase production," George said according to prepared remarks she will deliver at a conference in Houston.
When unemployment drops below a rate "consistent with the maximum sustainable level of employment," she said, "the U.S. economy soon after faced a period of substantial and prolonged increases in unemployment. The effect of allowing the economy to overheat in these cases produced short-term gains, but ultimately with longer-term costs. Consequently, I see moving sooner, rather than later, as taking into account the long and variable lags with which monetary policy operates, and reduces the potential for 'go-stop' types of policies that create volatility, rather than subdue it."
