Fed’s Esther George says jumbo rate rise risked adding to ‘policy uncertainty’


A top Federal Reserve official said the US central bank’s decision to raise its benchmark policy rate by three-quarters of a percentage point this week risked adding to “policy uncertainty” in a statement explaining her decision to oppose the move.

Esther George, president of the Fed’s Kansas City branch and typically one of the most hawkish voting members of the policy-setting Federal Open Market Committee, was the lone dissenter on Wednesday to the biggest rate rise since 1994, which lifted the federal funds rate to a new target range of 1.50 per cent to 1.75 per cent. She instead voted in favour of the Fed sticking with its previously telegraphed half-point increase.

Before the scheduled “blackout” period ahead of the policy meeting — during which policymakers’ public communications are limited — officials had explicitly backed another half-point rate rise, having delivered the first since 2000 in May.

But two alarming inflation reports released last week that not only indicated price pressures were mounting but also at risk of getting worse, prompted officials to rethink that pace, resulting in the larger-than-expected adjustment.

In a statement released on Friday, George said she “viewed that move as adding to policy uncertainty simultaneous with the start of balance sheet run-off”. In addition to raising interest rates, the Fed is also shrinking its $9tn balance sheet, a process that officially got under way on Wednesday.

“The speed with which we adjust the policy rate is important,” George said. “Policy changes affect the economy with a lag, and significant and abrupt changes can be unsettling to households and small businesses as they make necessary adjustments.”

She added that it had knock-on effects for US government bond markets and broader borrowing costs, but affirmed the case for tighter monetary policy was “clear-cut”.

Beyond implementing a jumbo-sized rate rise, the Fed also set forward an aggressive plan to tighten monetary policy this year and next in a bid to quell the worst inflation problem in four decades. Most officials now project rates will rise to 3.4 per cent by the end of 2022, a level chair Jay Powell said was expected to be “modestly restrictive” on economic activity.

Powell said he does not expect 0.75 percentage point moves to be “common”, but did say another was possible in July. He also said the Fed would look for a string of decelerating monthly inflation prints as it determines how aggressive it needs to continue being.

Neel Kashkari, the dovish president of the Minneapolis Fed, said on Friday that a move of that magnitude may be warranted in July, but warned about the risks of overdoing it.

“This uncertainty about how much tightening will be needed leads me to be cautious about too much more front-loading,” he said in remarks published on the bank’s website.

Kashkari said a “prudent strategy” may be continuing with half-point rate rises after the July meeting “until inflation is well on its way down to 2 per cent”.

The Fed, in a monetary policy report released to Congress on Friday, said its “commitment to restoring price stability — which is necessary for sustaining a strong labour market — is unconditional”.

Officials see additional adjustments in 2023, with rates potentially rising to 3.8 per cent, and modest cuts the following year.

Core inflation is set to fall as a result, with officials projecting it to settle at 2.7 per cent in 2023 and 2.3 per cent in 2024, from its 4.9 per cent level as of April. Reflecting that tighter monetary policy will probably dent the US labour market, policymakers pencilled in the unemployment rate rising to 4.1 per cent in 2024 from its current level of 3.6 per cent. The economy is still expected to expand, however, by 1.7 per cent this year and in 2023.

Economists say these forecasts do not fully acknowledge the extent of the economic pain probably associated with what the Fed will need to deliver if it is to root out high inflation. Many now see the economy tipping into a recession next year, as the odds of a so-called “soft landing” plummet.

“There is a path to a soft landing, but I think it’s very narrow, very hidden and will take a lot of luck to find,” said Roberto Perli, a former Fed staffer who is now head of global policy at Piper Sandler.


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