Jobs report bolsters Federal Reserve’s dissident

The Federal Reserve could take a cue from the businesses that added to their payrolls last month, the central bank’s chief dissenter says.

Employers hired in October, adding 204,000 jobs, despite the turmoil in Washington over the federal budget and debt.

“That hiring took place even with the government shutdown,” Esther George, president of the Federal Reserve Bank of Kansas City, said Friday in a speech in Kansas City, Kan.

Adding employees meant the businesses looked through the short-term concerns and acted according to the longer view of the economy’s recovery, she said.

The Federal Reserve, George added, needs to do the same.

“My concern is that we continue to be very aggressive in putting money into the economy while it is growing,” she said of current Fed policy, “and that our focus has been more short term versus long term in looking at the path the economy is on.”

George has dissented repeatedly this year to the Fed’s open-ended purchases of $85 billion in bonds each month, a strategy aimed at stimulating the economy.

The bond buying spree that began in September 2012 is the Fed’s third since the financial crisis. The Fed’s aim is to hold down long-term interest rates to help the housing market, auto sales and other activity to boost the economic recovery.

The Fed also has held short-term interest rates near zero since late 2008 and has vowed to keep them there at least until unemployment falls to 6.5 percent. Unemployment climbed to 7.3 percent in October, largely from the furloughed federal employees during the partial government shutdown.

The Fed’s weight on interest rates has helped the economy, but not without costs, George said.

“We punish savers with this policy,” she told her audience at a Fairfax Industrial Association gathering.

They’re forced to go without the income or put their money where it is less safe but paying higher rates. It exposes them to possible losses as interest rates rise.

“The policy is designed to get people to take more risks,” George said.

And that poses the risk of creating “distortions and imbalances” in the economy, she said. She noted that the Fed held its short-term interest rate at 1 percent in 2003 and 2004, “probably too low for too long, and we created 10 percent unemployment” as the housing market inflated into a bubble and burst.

As she did in September, George said it is time for the Fed to begin reducing its monthly bond purchases. It can act slowly to avoid disrupting the recovery, she said, but only if it begins to act soon.

The Fed has no experience to judge how the economy will react as the central bank reduces its bond buying from such an aggressive level, she said.

“Frankly, we’re not really going to know until we begin the process,” she said. “That’s why I advocate for starting early.”

The bond market and housing activity swooned this past summer when the Fed indicated it might begin to reduce its bond buying late this year. Markets had widely expected the Fed to begin that process with its September meeting, but the Fed has kept up its pace of purchases.

Fed policymakers are scheduled to meet again Dec. 17 and 18. It will be the last session George will have a vote on economic policy decisions until 2016.