Esther George, occasional Missouri farmer and practiced policy dissenter at the Federal Reserve, is back.
Three years ago, the president of the Federal Reserve Bank of Kansas City voted repeatedly against an unconventional bond-buying program championed by then-Fed chairman Ben Bernanke to bolster the economy.
George’s string of seven dissents in 2013 finally ended at the December 2013 meeting because policy shifted more to her way of thinking. With her last vote, she supported slowing down the bond buying.
But then George rotated off the voting schedule, shared with other regional bank presidents. For the next two years, it was their turn to vote, though George continued to push for her views during the Fed’s policy debates under current chairwoman Janet Yellen.
This year, George is back in the voting rotation starting with the Jan. 26-27 meeting, as the powerful group has embarked on another big policy shift.
Last month, the Fed ended its zero interest rate policy with the first rate increase in almost a decade. The move was controversial and widely watched. It was followed quickly by China’s stock market plunge, Wall Street’s shiver and experts’ chatter over signs of a recession.
It also was the first step toward a more normal policy, which is what George has been pushing for at Fed sessions even without a vote.
“It’s late,” George said of the Fed’s December interest rate boost in an interview two days after the event. “We’ve been at zero for a long time.”
Armed with a vote this year, the Kansas City Fed president moves more into the spotlight as the central bank decides when, or whether, to raise rates again and how high to take them.
“She’s likely to have increasing influence during 2016, and her perspectives, it strikes me, are likely to be very important,” former Fed governor Kevin Warsh said.
Warsh is among many who share George’s dissent against the long reign of zero interest rates and against the Fed’s multi-trillion-dollar bond buying program that had sparked her string of no votes in 2013.
At the same time, the dissidents admit that no one really knows what unraveling seven years of zero percent interest rates will do to an economy.
But America’s about to find out.
An uneasy feeling about zero interest rates followed George into the Fed job in October 2011. She also had doubts about the Fed’s spree of bond buying, which was called quantitative easing, or QE.
Admittedly, these were policies aimed at curing the nation’s financial crisis and Great Recession. But policy hadn’t changed even though the worst had passed years earlier.
George and others, at the Fed and elsewhere, have been concerned about what persistently low interest rates had done to the decisions of savers, investors, employers, lenders and consumers.
These policies, held in place for so long, have great potential “to distort markets, to affect the allocation of credit,” George said.
She’s watching for signs of just that in the turmoil amid junk bond markets, high farmland prices, exuberance in commercial real estate dealings, and a surge in auto sales financed in part by a car-loan version of subprime mortgages.
“All those are on my list,” George said. “Oil is another one. Even as oil prices were falling off, you saw money continue to flow into that.”
These are not mere academic concerns. They have real economic impact.
A surging market for high yield bonds, often called junk bonds, funneled $6.5 billion of capital into Sprint Corp. in 2013. In recent months, prices on those bonds have fallen by 25 percent.
The Overland Park-based wireless carrier now says it couldn’t afford to pay the interest rate that high yield bond investors are asking. It has had to find, even invent, other sources of funding.
Easy money had proved its disruptive power before, doubters of Fed policy say. Bubbles rocked the economy with the collapse in dot-com stocks in 2000 and the housing bust in 2007.
George said she isn’t calling any market a bubble. Doesn’t use the word. She is looking at economic activity that is hard to explain and that Fed policies seem to have influenced.
George often says she’s reflecting the economic voices of her district.
These are the business, labor and community leaders in the seven states covered by the Federal Reserve Bank of Kansas City, including Kansas and part of Missouri. They help her know what’s happening in the real economy, independent of what the economic forecasting models say.
“I tend to put less weight on models. They are informative. We use them here,” she said of the economics team at the Kansas City Fed. “I rely a lot on experiences and things I’ve seen.”
For many, input has led to admiration.
“She comes down and speaks to the Fairfax Industrial Association,” said Martin Quinn, whose Industrial Lumber Inc. operates in the Kansas City, Kan., business district. “She’s great. She’s absolutely great.”
Others share her worries about the lingering impacts of Fed policies.
One common concern is that investors have taken increasing risks with their money as Fed policies drove down returns on safer choices.
Many retirees who traditionally relied on federally insured bank accounts say they’ve turned to riskier investments like municipal bonds and dividend-paying stocks to earn the income bank CDs once paid.
Like mom-and-pop planners, institutional investors such as pensions also have reached into riskier deals to boost fading returns, says Mike Avery, president of Overland Park-based money manager Waddell & Reed Financial Inc.
“I think it is a post-crisis risk-return paradox,” Avery said. “They say, ‘I don’t want to take any risks but I still want the (investment returns) number I had prior to the crisis.’ ”
The Fed’s bond buying program, or QE, led business executives to take less risk, argues Warsh, the Fed governor who served from 2006 to 2011.
Warsh said that QE essentially was aimed at lifting stock prices. A “wealth effect” was supposed to help the real economy. Instead, he said, it changed businesses’ investment decisions.
Thanks to QE, Warsh and fellow economist Michael Spence contend, publicly traded companies spent more money in 2014 to buy back their own shares in the stock market than they spent on new equipment, factories and other capital improvements for their operations.
“This is an example of misallocations of capital,” Warsh said. “It’s one that we should take notice of as we evaluate what’s going to happen to the real economy in 2016.”
From a policy point, however, many of these arguments are not the consensus view.
Warsh, for example, notes the scathing rebuttal his work with Spence evoked from former U.S. Treasury secretary Larry Summers.
One reason George and some at the Fed have pushed to unwind easy policy is their assessment of the economy. It’s doing better than others think.
George said America has reached what economists call full employment.
At 5 percent unemployment, most of the remaining joblessness reflects structural problems, such as skills that don’t match job openings, rather than a slow economy.
It means that sizable jobs gains from here likely push wages higher, helping to improve household budgets, strengthening consumers’ finances and driving up inflation.
That’s a good place to reach, but there can be problems if interest rates are still at crisis levels. All that push from the Fed risks overheating the economy.
“If we wait until we’ve arrived, then we’ve waited too long,” George said.
It’s why George called the December interest rate boost a late start. Starting sooner, as she had pushed for last July, would give the Fed more time to return interest rates to normal and more time for the economy to adjust to higher rates.
“I think she’s absolutely right,” said economist Richard Nelson, who served as chief economist of the San Francisco Federal Home Loan Bank.
“But this is not a clear decision. It’s a very difficult decision, and only time is going to tell,” Nelson said.