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Fed’s George Says Time Has Come to Normalize Monetary Policy

BY MICHAEL S. DERBY | UPDATED JAN 11, 2022 09:30 AM EST

It is time for the central bank to begin withdrawing stimulus from the economy, although the complexity of doing this could create volatility in financial markets, Federal Reserve Bank of Kansas City President Esther George said.

“Even as the pandemic continues to influence economic activity, the time has come to transition monetary policy away from its current crisis stance towards a more normal posture in the interest of long-run stability," Ms. George said in a speech text Tuesday.

Ms. George will be a voting member of the rate-setting Federal Open Market Committee this year. Her comments Tuesday were her first of the year and arrive as the central bank is moving at an accelerated pace toward drawing down the extraordinary level of support it has provided the economy over the course of the pandemic.

The Fed is on track to end purchases of Treasury and mortgage bonds that expand its balance sheet in March. A number of central bankers have said they are open to raising the Fed’s short-term interest-rate target from near zero that month. Some officials have also said they see a steady course of rate rises and that they are inclined to start letting the Fed’s balance sheet shrink soon after rate rises begin.

Ms. George has long been a skeptic of easy monetary policy settings, and has opposed the stance of her colleagues more than half of the time in previous years when she was an FOMC voter. But as 2022 starts, her hawkish outlook is in alignment with other officials.

In her speech, the central banker didn’t provide any timelines for action. But Ms. George did say, “My own preference would be to opt for running down the balance sheet earlier rather than later as we plot a path for removing monetary accommodation."

Keeping the Fed balance sheet large even as short-term rates go up could distort financial markets and drive investors toward more risk taking than is prudent. That said, Ms. George warned that the process of normalizing monetary policy may be challenging.

“With robust demand, high inflation and a tight labor market, policy makers will need to grapple with the appropriate speed and magnitude of adjustments across multiple policy tools as they work to achieve their long-run objectives for employment and price stability," Ms. George said. “That transition could be a bumpy one, with the prospect of asset valuation adjustments and the recalibration of supply and demand towards a new equilibrium."

Ms. George was upbeat about the economic outlook but warned of ongoing labor-market shortages.

“My own expectation is that the strength of the underlying fundamentals will continue to support solid consumption growth," she said. The latest wave of coronavirus infections “has added uncertainty to the outlook," but “I don’t believe it has changed the overall picture of strong demand continuing to push up on constrained supply," she added.

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