Kansas City Fed CEO warns of rate hike ‘oversteer’

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According to Esther George, president and CEO of the Federal Reserve Bank of Kansas City, sudden changes in interest rates can weigh on the economy and financial markets.

In a speech titled “Tightening monetary policy in a tight economy”, George pointed out that “communicating the path of interest rates is probably much more important than how fast we get there.”

George suggested that moving interest rates too quickly raises the prospect of “oversteer”.

The Fed has been raising interest rates since March in an attempt to rein in inflation, but George noted that even before that yield the Treasury had already “increased considerably”.

Moreover, financial conditions were already tightening before the March hike.

George said it was because expectations were building for significant monetary policy adjustments.

She commented: “This is already a historically rapid pace of rate hikes that households and businesses must adjust to, and more abrupt changes in interest rates could create strains, whether in the economy or in financial markets, which would jeopardize the Fed’s ability to follow the higher path of reported rates.

George also indicated his surprise at the talk of recession risk, while there have also been forecasts of interest rate cuts for next year.

Such projections suggest that a rapid pace of rate increases brings the risk of policy tightening faster than the economy and markets can adapt, George said.

To achieve price stability, George has increased his support for ongoing rate hikes accompanied by a significant reduction in the size of the balance sheet.

“The pace at which this path unfolds will need to be carefully balanced against the state of the economy and financial markets, particularly in times of heightened uncertainty, to effectively achieve this goal,” concluded George.

The Fed’s latest annual stress tests revealed that major US banks have “high levels of capital” and could face a severe global recession and absorb more than $600 billion in losses.


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