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The Fed’s economic ‘experiment’ isn’t over, KC Fed’s Esther George says

Esther George, president of the Federal Reserve Bank of Kansas City, answered questions after her address Monday to members of the Fairfax Industrial Association.
Esther George, president of the Federal Reserve Bank of Kansas City, answered questions after her address Monday to members of the Fairfax Industrial Association.

The Federal Reserve’s frequent dissenter from Kansas City is on board with its “gradual” approach to unwinding trillions of dollars of economic stimulus — up to a point.

Esther George, president of the Federal Reserve Bank of Kansas City, said Monday that she and other Fed policymakers need to stay on their intended path to ensure that inflation doesn’t have a chance to grab hold of the economy.

“Inflation moves quickly,” George said after speaking to members of the Fairfax Industrial Association at the Kansas City Fed. “I don’t think you need to wait to see the whites of its eyes.”

The Fed has set a schedule for unwinding much of the $4.5 trillion it holds in mostly long-term Treasury bonds and securities backed by home mortgages. It scooped them up in three rounds of quantitative easing, or QE, in an effort to boost a sluggish recovery from the Great Recession and financial crisis.

Each purchase increased the reserves that banks held and presumably helped to lower or hold down long-term interest rates for prospective borrowers.

“We saturated the economy with money that could be loaned out,” George said during her presentation. “You can’t leave it out there forever. It can create issues.”

Just how fast the Fed should remove all that money remains a focus of policy debates.

“This was an experiment from the start. Unwinding it will be an experiment as well,” George said.

George is one of 12 regional Fed presidents that help set the central bank’s monetary policy. She had dissented regularly as the Fed engaged in quantitative easing during 2013. She also had said the Fed was late to start raising interest rates with its first increase in December 2015 and advocated for additional increases.

The Fed has raised its benchmark rate to 1.25 percent from near zero during most of the recovery.

Next, the Fed will begin to reduce its enormous security holdings that it built up through its quantitative easing policy.

George said the Fed does not plan to start selling securities but will begin to allow them to mature and pay off. Currently, it has been using proceeds from maturing securities to buy more securities to keep its holdings steady.

Just when the Fed will begin to unwind its portfolio remains unclear, though its latest policy statement said “relatively soon.”

Some have concerns that unwinding three rounds of QE could put as much restraint on the recovery as engaging in three rounds of QE helped the recovery.

Reducing the Fed’s holdings of these securities also is expected to coincide with additional steps to raise interest rates closer to normal levels, which also removes stimulus from the economy.

George said the effectiveness of QE likely will be debated far into the future.

“Some say you should put it back in the box and throw away the key,” George said.

She said the economic recovery offers reasons to start unwinding QE. Growth has reached a sustainable, albeit modest, pace of 2 percent a year and joblessness had fallen to 4.3 percent. She also expects wage increases ahead.

Mark Davis: 816-234-4372, @mdkcstar

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