Kansas City Fed’s George says rein in bond purchases

Esther George, president of the Federal Reserve Bank of Kansas City
Esther George, president of the Federal Reserve Bank of Kansas City

The Federal Reserve should begin to reduce its bond purchases this fall and stop that aggressive policy altogether by mid-2014, Kansas City Federal Reserve President Esther George said Tuesday.

George, who has dissented at each policy meeting of the Federal Reserve in Washington this year, offered her plan during an address in Kansas City.

The clear timetable she laid out contrasted with the Fed’s official watch-and-see approach to when the central bank should cut back on its purchases of mortgage-backed and U.S. Treasury securities.

Her comments come just ahead of Fed Chairman Ben Bernanke’s testimony before the House Financial Services Committee today and Thursday.

The Fed is buying $85 billion in securities monthly and plans to keep buying until the labor market shows substantial improvement. The purchases are part of the Fed’s multiple efforts, including holding interest rates near zero, to boost the economy by driving down long-term interest rates.

“I’ve been more skeptical that the real economy has benefited sufficiently to warrant the risks that I see associated with such aggressive easing during a sustained recovery,” she said.

The risks, she said, include distortions to financial markets, excessive risk taking and additional volatility, all of which could threaten the long-term health of the economy. She weighs those risks against the limited benefits she sees from the Fed’s bond purchases.

Markets already have begun to adjust to the reality that aggressive Fed behavior can’t last forever, she said. She pointed out that interest rates began to climb even before Bernanke said in June that the Fed could begin to cut back on its bond purchases later this year.

His comments accelerated the spike in long-term interest rates. He and other Fed policymakers followed with public reassurances that the Fed hadn’t changed its policy of buying bonds.

George’s message Tuesday — and in those Fed meetings in Washington — was that it should.

“Specifically, I would like to see the FOMC (Fed policy committee) begin to systematically reduce the pace of purchases in a matter that brings the program to an end sometime in the the first half of next year,” she said.

George said the labor market was improving even though unemployment remained too high. More workers are quitting jobs, she said, a sign that they found better conditions in another job.

It’s evidence, she said, the Fed could begin to curb bond buying this fall and end it next year. She said the Fed could move even faster if its forecasts for improvements in employment turn out to be too pessimistic.