The Federal Reserve should consider slowing “regular and deliberate” interest rate hikes, Kansa City Fed Chair Esther George said Thursday.
“A more measured approach to rate increases can be particularly helpful as policymakers judge the economy’s response to higher rates,” George said, in a speech at a conference on energy and finance. economy sponsored by the Dallas Fed.
The Fed raised its benchmark rate at the fastest rate since 1980 – from near zero to a range of 3.75% to 4%.
At the same time, the central bank is allowing $95 billion worth of Treasury bills and mortgage-backed securities to exit its balance sheet.
George said the speed at which rates rose likely contributed to the “marked” increase in market uncertainty about the path of Fed policy.
“As the tightening cycle continues, the timing is particularly important to avoid contributing unduly to financial market volatility, especially as volatility strains market liquidity with the potential to complicate recovery plans. liquidation of balance sheets,” she said.
Despite these measures, imbalances in the economy and labor market persist, suggesting the Fed must continue to tighten, George said.
How far and how fast will interest rates have to rise?
Some argue that rates must exceed the expected rate of inflation. With consumers expecting inflation to hover around 5% over the next year, this measure would point to higher rates.
George said consumers have large reserves of liquid savings. Whether those savings are spent or saved will be important in shaping the outlook, she said.
“It could very well take a higher interest rate for a while to convince households to hold onto those savings rather than spend them and add to the inflationary impulse,” she said.
George said the pace of the hikes is less important than “the strength and communication” of the Fed’s commitment to bringing inflation back to the 2% target.
“There is no doubt that monetary policy must react decisively to high inflation to avoid anchoring future inflation expectations. In my view, a firm commitment to bring inflation back to the FOMC target is important. So is the pace of rate increases,” George said.
were significantly higher on the back of the weaker than expected consumer inflation report. The yield of the 10-year Treasury note TMUBMUSD10Y,
dropped to 3.86%.