Esther George: Dont Wait Until Inflation Looks Like A Problem

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Kansas City Federal Reserve Bank President Esther George spoke with Fox Business Network’s (FBN) Peter Barnes regarding the subjects of this year’s symposium, the status of the labor market, the housing market and the state of the economy and the consumer now and moving forward. George said the subject of this year’s symposium is, “reevaluating labor market dynamics,” and they will be, “exploring issues in the conference of various aspects of labor markets.” George says that, “we’ve seen a broad-based improvement,” and, “I think that signals something about the overall recovery in the economy.” In regards to the economy and labor markets George said, “the committee will and has been discussing normalization.” On inflation George said, “we don’t want to wait until inflation looks like a problem,” and that they are, “always watching it because in the long-term monetary policy affects price stability.” On the state of the housing market George said, “the housing market has been particularly difficult to read,” and, “the consumer is clearly being more cautious.”

The agenda for this year’s symposium:

Well, the subject of this year’s symposium is labor markets.  So we’re going to — the title is “Reevaluating Labor Market Dynamics.” It’s our objective, when we pick a topic, to look at something that is currently affecting policy makers, jobs and hoping that by the time the conference rolls around, it will remain as relevant as it seemed at that point we picked it. So this year, we’ll be exploring issues in the conference of various aspects of labor markets, of bringing research to bear and discussion during the conference that we hope enlightens the issues.

Esther George on whether the issues with the labor market have been structural or cyclical:

“I think there’s no question it’s both.  You see both in that, so through the Labor Force Participation Rate has declined.  That’s been a — a three decade trend. But, clearly, the recession did cause more people to fall out of the labor force. So you have to think about both of those issues. The question, I think, is what other factors influence those? And many of those are beyond the reach of monetary policy to fix.”

Esther George on how labor markets impact monetary policy:

“Well, it’s understanding what you are seeing in the economy is critical.  So various measures of unemployment, looking at why people aren’t working, looking at demand and all of those factors play into that. I think my own sense is we’ve seen a broad-based improvement, particularly this year, in labor markets and I think that signals something about the overall recovery in the economy and how monetary policy might need to adjust going forward.”

Esther George on how the recovery is progressing:

“Well, the economy is growing, um, at a rate slower than I think people hoped or even had projected at some point.  There is still uncertainty there.  This is an economy where households have been deleveraging over the last few years. So some of the normal response to monetary policy that we might have seen in the past has been different this time. But that said, I think compared to a year ago there has been broad-based improvement.”

Esther George on plans to normalize interest rates:

“Well, my objective is not to see rates rise sharply, Peter.  But I do think many of the policy benchmarks we look at are already signaling that we should be off of 0.  And as we see the economy improve, we should begin sooner rather than later, in my view, so that the economy has time to adjust to moving off of negative real interest rates.

Esther George on the need to begin normalization sooner rather than later:

“It’s important because we don’t want to have to react quickly.  We don’t want to wait until inflation looks like a problem.  We don’t want to wait until risk in the economy around financial stability raise concerns. So I think being systematic in our approach I think the approach we’ve used in the tapering process, to the asset purchase program, which has been deliberate and yet steady has been a helpful way to think about how we go about policy…Once you make a decision to act, you know data comes in.  Sometimes the data looks better than you thought, some times worse.  But to kind of look to the long-term trend, um, and to follow through on that, I think, will be important.”

Esther George on fears a move towards normalization would derail the recovery:

“A very, I think a very natural response when you get to this point is worrying that you might derail the recovery.  But then again, we have seen data come in stronger than we expected.  So the labor markets have progressed faster than some of the forecasts have suggested they would. So I think when you look at on the whole, thinking about the progress you’ve made and then acting, avoids getting behind the curve, because we know over history…that brings its own set of consequences, too.”

Esther George on whether the recovery is on a healthy pace:

“Well, you can’t be sure, but you continue to look at the progress we’ve made and the trends that we’ve seen so far.  And they are very encouraging. That doesn’t mean that there are still not gaps in the labor market, there are still people that aren’t employed.But monetary policy has to look ahead, I think.  And it will be important that we do so.”

Esther George on potential headwinds that might derail the recovery:

“You know, I think there are always some down side risks.  There are always headwinds of some kind. The housing market has been particularly difficult to read both because we have new regulations that are affecting access to credit, in some cases.  The demand for housing looks to be different.  So you see more demand in multi-family housing, for example.  So there are many factors, both on the demand and supply side of housing. The most recent data was encouraging.  So, again, I think comparing year-over-year to see are you making forward progress is what you have to keep in mind.”

Esther George on wage growth and household income:

“Well, the consumer is clearly being more cautious, I think.  Again, the consumer came from a very highly leveraged position and you can tell in spending, I think, that there is a bit more caution with that. Wage growth is better year-over-year than we’ve seen it.  So, again, it’s not moving rapidly, but it is moving forward. So I think compared to other periods when we’ve seen slack in the labor markets, wage growth does not look out of line to me right now.”

Esther George on political instability in the global economy:

“Well, the committee is always looking the risk to its forecast.  And certainly, geopolitical issues, um, are on the horizon, to know how markets will react to that.  But I think at this point, there’s — there’s no action on the part of the committee to address those.  It’s simply keeping an eye on them, and seeing to what extent you see the effects on your economy.”

Esther George on inflation:

“So inflation looks stable right now.  And if you look at long-term inflation expectations, those seem stable. So, I think the economy is in a place where, as we look ahead, there is enough progress to begin to think about the discussion around normalization.  And inflation doesn’t seem to be a particular risk, in my view, right now.”

Esther George on whether she is OK with the inflation outlook right now:

“Yes….but always watching it, because in the long-term monetary policy affects price stability.”

Esther George on asset bubbles:

“Well, I don’t try to pick where I think there’s a bubble, because I learned years ago as a bank supervisor, you’re not going to be able to figure out when you’re at the top of the risk curve.  What you do look at though is where are the incentives to reach for yield? And I think you read in the headlines every day that there is complacency in some markets.  It’s difficult, I think, for markets to price risk at 0 interest rates.  So policymakers have to be aware of that.  And I look at that carefully… we don’t want to pick two variables and not take into account what’s happening in the broader economy.”

Esther George on what she’d like Chair Yellen to address in her speech on Friday:

“Well, Chair Yellen, I’m delighted she could be at the symposium this year.  Her background, her research has been in labor markets, so we look forward to her comments…So we appreciate her being here and I’m sure what she has to bring will bring insight to the conference.”

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