12/02/2013 18:59:00

Kansas City Fed's George Warns About Current FOMC Policy

By Ben Kesling

OMAHA, Neb.--The lone dissenting voice on the Federal Open Market Committee defended her hawkish philosophy Tuesday and reiterated her call for the Federal Reserve to proceed cautiously with easy money policies.

Kansas City Federal Reserve President Esther George laid out her reasons for dissenting from current Fed monetary policy in a speech at the University of Nebraska Omaha on Tuesday morning, explaining her opposition to the FOMC's current policy position.

"While I share the objectives [of the FOMC]," Ms. George said, "I dissented because of possible risks and the possible costs of these policies exceeding their benefits...While I have agreed with keeping rates low to support this recovery, I know keeping interest rates near zero has its own consequences."

Ms. George took over as president of the Kansas City Fed in October 2011 and became a voting member of the FOMC in January. She continues the hawkish legacy of her immediate predecessor, Thomas Hoenig who was known for his long-time disagreement with easy money policy in his 20-year tenure at the head of the bank.

In her speech Tuesday, she warned that by keeping rates low, the Fed is pushing banks and investors to seek out high-yield investments that can be risky, especially as those investments take up more and more space on financial institutions' balance sheets.

"It is very difficult to identify the point where a healthy shift towards risk becomes excessive and potentially damaging," she said.

Ms. George also cautioned that the Fed will need to eventually sell the mortgage-backed securities that it is currently adding to its balance sheet and that an active selloff could cause "an unwelcome rise in mortgage interest rates."

"I approach these decisions with a healthy dose of humility," she said.

Her predecessor, Mr. Hoenig was an outspoken hawk who often warned that low interest rates, or easy money, might lead to price bubbles and accelerated inflation. He dissented at all eight of the meetings of the FOMC in 2010, the last time the Kansas City Fed had a voting seat.

January was the first FOMC meeting at which Ms. George was eligible to vote, and she was the lone dissenting voice to the current Fed policy of buying $85 billion a month of mortgage-backed and Treasury securities, and keeping interest rates low in the hopes of fueling economic recovery. The Fed has said it aims for an unemployment rate of 6.5% as long as inflation remains at less than 2.5%.

But if the Fed fumbles its inflation goals and allows rates to rise too much it could jeopardize the reputation of the institution, she said.

"It's important that people not only understand the institution but that they have trust in the institution," she said. "The credibility of the Federal Reserve is critical."

Ms. George, after just one vote on the FOMC, looks like she will continue to put up a vigorous fight to rein in easy money, but that doesn't mean she is convincing any of her voting peers, and a lone dissenting voice will not change policy.

The three heaviest hitters on the FOMC: Fed Chairman Ben Bernanke, Federal Reserve Vice Chairman Janet Yellen and New York Fed President William Dudley are all steadfast supporters of current policy.

On Monday, Ms. Yellen, spoke to the AFL-CIO and reiterated that the Fed is leaning hard into easy money policies. "We have our foot not only on the gas, but really pressed to the floor," she said. Ms. Yellen is considered a likely choice to replace current Mr. Bernanke and to push to continue his policies.

Although she is the sole dissenting voice, other Fed presidents have said they are concerned about FOMC polices. Speaking at a panel at the University of Chicago in December, Charles Plosser, President of the Philadelphia Fed, who doesn't have a vote on the FOMC, said the central bank needs to be "a little more humble, and be cautious about the consequence of [its] actions."

James Bullard, St. Louis Fed president, who does have a vote, said in January that he has some concern about the debt the U.S. government is racking up with its current bond buying program. "That's more than a trillion dollars annually," he said. "I'm in the business and even I think that's a big number."

Ms. George is a long-time Kansas City Fed employee who first started working there in 1982. Beginning in 2001 she oversaw the bank's division of supervision and risk management, regulating banks and financial institutions in the tenth district, which includes western Missouri, Nebraska, Kansas, Oklahoma, Wyoming, Colorado and northern New Mexico. In 2009, she was appointed chief operating officer and first vice-president, a position she held until taking over at the bank.

Write to Ben Kesling at:benjamin.kesling@dowjones.com

(END) Dow Jones Newswires

February 12, 2013 13:59 ET (18:59 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.

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