Fed’s Esther George says jumbo rate rise risked adding to ‘policy uncertainty’
A top Federal Reserve official said the Federal Reserve’s decision to raise its policy rate by three-quarters of a percentage point this week could add to “policy uncertainty” in a statement explaining its decision to oppose the move.
Esther George, president of the Kansas City branch of the Fed and usually one of the most aggressive voting members of the policy-making Federal Open Market Committee, was the only one on Wednesday to disagree with the largest rate hike since 1994, pushing federal fund rates to a new target range of 1.50 percent to 1.75 percent. She voted instead for the Fed sticking to its previously telegraphic half-point raise.
Before the planned “blackout” period ahead of the policy meeting — during which policymakers’ public communications are limited — officials had explicitly backed another half-point rate hike, following the first since 2000 in May.
But two alarming inflation reports released last week, indicating not only that price pressures were mounting but also risking worsening, prompted officials to reconsider that pace, resulting in the larger-than-expected adjustment.
In a statement released Friday, George said she “viewed the move as adding to the policy uncertainty as the balance sheet begins to roll off.” In addition to raising interest rates, the Fed is also shrinking its $9 trillion balance sheet, a process that officially began on Wednesday.
“The speed with which we adjust the key rate is important,” George says. “Policy changes affect the economy with some lag, and significant and abrupt changes can be troubling for households and small businesses as they make the necessary adjustments.”
She added that it had a knock-on effect on the markets for US Treasuries and broader borrowing costs, but confirmed the arguments for tighter monetary policy were “clear”.
In addition to launching a massive rate hike, the Fed also launched an aggressive plan to tighten monetary policy this year and next in a bid to quell the worst inflation problem in four decades. Most officials now projecting will rise to 3.4 percent by the end of 2022, a level chairman Jay Powell said was expected to be “modestly restrictive” on economic activity.
Further increases are expected in 2023, with a potential as high as 3.8 percent, before modest cuts follow the following year.
Core inflation will decline as a result, with officials forecasting it to stabilize at 2.7 percent in 2023 and 2.3 percent in 2024, from its April level of 4.9 percent. Reflecting that tighter monetary policy is likely to dent the U.S. job market, policymakers predicted the unemployment rate would rise to 4.1 percent in 2024 from its current level of 3.6 percent. However, the economy is expected to grow by 1.7 percent this year and in 2023.
Economists say these forecasts do not fully recognize the magnitude of the economic pain likely to accompany what the Fed will have to deliver to stamp out high inflation. Many see the economy slipping into recession next year as the chances of a so-called “soft landing” fall.
“There is a path to a soft landing, but I think it’s very narrow, very hidden, and it will take a lot of luck to find it,” said Roberto Perli, a former Fed employee who is now the head of global operations. policy is with Piper Sandler.