‘Risk at zero interest rates’

Note: This article was published originally on Feb. 21, 2012.

As the newest voice in America's economic debate, Kansas City's Esther George stands out as someone ready to make waves.

George, 54, has served quietly in her first months on the Federal Reserve's powerful monetary policy committee in Washington.

This interview with The Kansas City Star, conducted in her 14th-floor office that overlooks the city skyline as well as the Occupy KC encampment, is the first she has given since becoming president of the Federal Reserve Bank of Kansas City last October.

The post is George's ticket to those Washington policy sessions led by Fed Chairman Ben Bernanke. This is the group - mostly a collection of Ph.D economists - that has vowed to hold interest rates near zero until late 2014.

George isn't so sure.

"I have a lot of questions about whether we're serving ourselves well in the long term with this policy, " she said in a nearly hourlong interview.

Her comments, edited for clarity and length, question the wisdom of another round of bond buying at the Fed, reveal why she voluntarily released her personal financial disclosure report, touch on the Volcker Rule and banks considered too big to fail, and tell how she deals with a room full of economists.

Readers may see similarities to the views loudly expressed by her predecessor, Tom Hoenig, who dissented against Fed policy at every session in 2010.

Mostly, George, one of five women on the Fed committee, says she takes her own views on the economy and policy to those meetings.

"I hope I don't intimidate any economists by doing so, " she said wryly.

Q: You've been at the Kansas City Fed since 1982. As its new president, is joining the Fed's Federal Open Market Committee (FOMC) that decides monetary policy the biggest change for you?

A: So much of what I do today is familiar in that I've been at the Federal Reserve Bank of Kansas City for a long time. What's different is, you realize the enormity of the decisions that you make.

Certainly the FOMC poses the sense of a national responsibility. But I'm the head of a large organization here - 1,300 employees look to me to help set direction, provide a work environment that helps them be successful and carry out the Federal Reserve's work.

Q: As a member of the FOMC, have your projections for economic growth, unemployment and inflation generally been in the midrange of the published forecasts, what the Fed calls the committee's central tendency?

A: The whole forecasting business is new to me, and I take it for what it is.

For example, the January projections pretty soon become stale, because we got new data coming in right after our meeting. We got better unemployment data. We got auto sales data. We got GDP data.

We have a dynamic economy, and you have to constantly be looking at that.

You would see me lining up with the Blue Chip Consensus, with the central tendency of the committee. I've been projecting that, for this year, we'd be somewhere around a trend rate of growth of 2.5 percent or so. By the end of the year, if things keep going as they are, we ought to see unemployment continue to come down, to below 8 percent.

Over the long run, right now, it looks like inflation is going to stay around 2 percent. I think that's how the central tendency of those forecasts came out for the committee.

So near term, inflation looks to be pretty well-anchored.

Q: In your only public speech as president, about a month ago, you talked about policy efforts to speed consumers' effort to reduce their debt burden. What is the risk in that?

A: It's an important process to get comfortable, that consumers can make decisions out in future. In normal recessions, the way that happens is, people begin to borrow again. We're not seeing that this time.

Having interest rates at zero would be designed to incent borrowing. There is a risk at zero interest rates. It can create distortions. You start mispricing risk. It creates euphoria.

I hear it from people in the district. When I talk to them about how they're pricing real estate transactions, how they think about investments. We had someone at a roundtable say, "I wouldn't do this deal if interest rates weren't so low."

The question is, are you creating a sustainable recovery? That's what we want.

At some point you have to bring rates back up when the economy looks strong enough.

That's always challenging for policy-makers: Will we time it right to stay ahead of those kinds of distortions and inflation? Inflation sneaks up on you sometimes.

Q: You vote on Fed policy decisions every third year, but the Fed has pledged to hold rates down until at least late 2014. Where does that leave you as a voting member next year?

A: We have to see how the economy unfolds. If the economy continues to improve, then I think you have to ask, is this still appropriate?

If you read the statement, the statement says holding the rate there is conditioned on the economy. Now, have markets put that conditionality in their decision making? I hear a lot of people saying the Fed is committed to 2014, and so I worry about that.

Q: We learned from the FOMC's first-ever rate forecasts in January that three members expect rates to go up this year, three next year, etc., but we don't know who. What is your forecast?

A: What I would tell you is, I'm looking at what are the unintended consequences of zero interest rates going forward.

I spend a lot of my time reading. I listen to my colleagues that believe this is the right way to go, to understand how they view this stance of policy. And I have a lot of questions about whether we're serving ourselves well in the long term with this policy.

Q: Charles Schwab, the brokerage company founder, wrote in The Wall Street Journal that the "Fed's prolonged, 'emergency' near-zero interest rate policy is now harming our economy" by destroying confidence. And committing to zero rates for nearly three more years is "sending a signal of crisis, not confidence." Is there something to that?

A: Charles Schwab isn't the only one saying that. I think it's a fair question to raise, given when we came out of the crisis we didn't adjust.

We didn't adjust because unemployment was still very high and the economy was growing slowly. But three years of zero interest rates have not immediately turned the economy around either.

Savers are suffering. Pension funds are suffering. And I think you have to step back and say, given where housing is, given this deleveraging process, can you really speed that up, or is that a process the economy has to go through to come out stronger on the other side?

Q: Other Fed presidents have split on whether to hold another round of bond buying by the Fed, a policy that is being called QE3. What's your view?

A: As the economy continues to improve and grow, what is the rationale for more accommodation? I don't see the evidence that would say more accommodation on top of extraordinary accommodation is warranted right now.

People often ask, "Do you still have those tools?" Yeah. But you have to be careful saying what's possible with what's practical and necessary.

Q: The FOMC has evolved into a group of economists. Ten of the 17 members have a Ph.D in economics. Others have a master's or bachelor's degree in economics. Your degrees have come in business and executive training. You have a history of bank supervision. How do you sway a room full of economists about the best medicine for the economy?

A: You don't ever sway a room full of economists, because they don't agree with each other.

The question is not what degree or particular lens you bring to (the FOMC).

My goal always is to learn. I'm happy to be convinced of another view.

But my job is to bring a view to that table. And that's how I go about doing it.

I feel very comfortable at that table. I can bring a view to that discussion. I hope I don't intimidate any economists by doing so.

Q: Is your bank supervision background important?

A: It's very important. Monetary policy has for the most part come through the banking system as a credit channel. It is also core to the payment system in this country.

Understanding how that mechanism works is critical to understanding how decisions you make at the FOMC translate, how they move through the economy.

Q: What do you think of the Volcker Rule to limit banks' ability to trade actively?

A: I absolutely support the Volcker Rule. Banks over time tried to compete with investment banks, and we removed the Glass-Steagall Act to allow them a marked change in their culture around trading.

I would not argue that was the problem in the crisis, but over time it built size, it built scale, and it built a risk appetite and culture in those organizations that you do not want a safety net underneath.

Q: Are the nation's biggest banks too big?

A: Yes. Clearly they're too big. A bank down the street here, if it got in trouble, we'd call the FDIC and set a date to close it and sell it. We could not do that with these banks.

And it is a big issue for us if we're not going to get ourselves back to where we were in the crisis.

Q: What's your prescription?

A: The Dodd-Frank Act made a run at resolution for these largest banks. But we don't have the rules written yet. I don't know if that will prove to be practical.

We'll see what kind of resolve comes behind those rules in terms of the role of the FDIC and others. If we could get Tom Hoenig confirmed as (vice chairman of the) FDIC, he's just waiting for the vote.

Q: The Fed's latest transparency move was to release the personal financial disclosures of the Fed presidents, including the one you filed last August before you were appointed. Did you know that then?

A: Never expected that would be public, nor should it have been.

Those forms have been for years filed under confidentiality, because the Fed presidents have not been subject to political appointments as the (Fed) governors are.

I'll tell you why I agreed to do that voluntarily. It was not required. It was my sense that providing this to the public, because I do participate on the FOMC, was a way to signal that integrity is critical to us, that I do not have conflicts, that I do adhere to the rules about code of conduct.

Q: What do you make of the Occupy KC movement?

A: I think they represent the frustration and anger of most Americans. Whether they've articulated it, whether they get the attention and respect that it's a legitimate movement, at the end of the day I take note of their frustration.

Q: How long do you plan to stay in this job?

A: I hope to do it until they kick me out the door at 65.

August 2011 Financial Disclosure Report by Esther George as presented to the Federal Reserve Bank of Kansas City

The minimum value of her reported assets, which is $255,006, was roughly in the middle of a ranking of the 12 regional Fed presidents compiled by The New York Times.

▪ Between $250,001 and $500,000

▪ St. Joseph farm, half interest

▪ Less than $50,000 but more than $1,001

▪ Vanguard Star Fund IRA

▪ Vanguard Equity Income Fund

▪ Vanguard Total Stock Market Fund

▪ Vanguard High Dividend Yield Income Fund

▪ Public Education Employees Retirement System of Missouri

Less than $1,001

▪ Westar Energy Inc. shares, Chinaberry Inc. shares

Esther L. George

Personal

▪ Born 1958, Faucett, Mo.

▪ Resident of Weatherby Lake

▪ Married to Kevin George

▪ A daughter and son, both in college

Education

▪ BSBA in business administration, Missouri Western State University

MBA, University of Missouri-Kansas City

▪ American Bankers Association Stonier Graduate School of Banking

▪ Stanford University Executive Program

Career

▪ Dun & Bradstreet Inc., 1980-82

▪ Federal Reserve Bank of Kansas City, 1982-present

This story was originally published January 12, 2016 at 11:10 AM with the headline "‘Risk at zero interest rates’."