Fed should keep raising interest rates, KC’s Esther George says

Esther George (right) is president of the Federal Reserve Bank of Kansas City.
Esther George (right) is president of the Federal Reserve Bank of Kansas City.

The U.S. economy is “in a good spot” and the Federal Reserve should continue raising interest rates, Esther George, president of the Fed’s Kansas City regional bank, said Tuesday.

In her annual address to the Central Exchange in Kansas City, George noted increased stock market volatility but said Fed policy “cannot respond to every blip in financial markets.”

Nor should that volatility stop the Fed from its plans to gradually return interest rates to normal levels, she said. The Fed took the first step with a rate increase in December, which George supported as a voting member on monetary policy decisions this year.

“My view is that the (Fed’s policy) committee should continue the gradual adjustment of moving rates higher to keep them aligned with economic activity and inflation,” George said.

Her comments came a day after Stanley Fischer, vice chairman of the Fed, said financial market turmoil and uncertainty about China’s market had left policymakers undecided about what to do next.

“If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States,” Fischer said in prepared remarks. “But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.”

In trading this year, the Dow Jones industrial average had fallen nearly 10 percent through Jan. 20. It has rallied somewhat but was down again Tuesday.

George left the exact timing of additional interest rate increases to prevailing economic conditions, noting that growth of about 2 percent in recent years probably continues this year. Consumer spending, she said, is getting a boost from low gasoline prices, signs of wage growth and increasing employment.

She said policy from the central bank remains highly accommodative to further growth despite the first rate increase in nearly a decade.

Fed policymakers cannot wait until they achieve employment and inflation goals to return rates to normal levels, George said. Interest rate changes affect the economy with a long lag time, and that lag varies.

George’s remarks were similar to ones she made in an interview with The Kansas City Star shortly after the Fed raised interest rates in December.

Still, she is mindful of a sharp slowdown in energy industries, manufacturing and exports.

Job growth, George pointed out, has remained strong even as the economy’s growth rate slowed late last year. She also said slower population growth means “not as many jobs need to be created as in the past” to employ the lower number of people entering the workforce.

“As a result, I expect to see employment growth slow from its recent pace and would not interpret a modest slowdown as a sign of trouble in the economy,” George said.

Bloomberg contributed to this report.

Mark Davis: 816-234-4372, @mdkcstar