Fed’s George Wants Rate Increases by Middle of the Year from WSJ

• ByMichael S. Derby and Amy Stroth

Federal Reserve Bank of Kansas City President Esther George wants to see the U.S. central bank start raising short-term interest rates at some point over the summer, worrying that if Fed doesn’t get moving soon future rate increases may have to be more aggressive.
“I continue to support liftoff towards the middle of this year due to improvement in the labor market, expectations of firmer inflation, and the balance of risks over the medium and longer run,” Ms. George said in a speech in Kansas City, Mo.
“Waiting until economic conditions are nearly back to normal before raising rates may put policy behind the curve and require rates to rise rapidly in the future,” she said. The official noted that when the Fed does begin raising rates, it won’t be on “autopilot” and that subsequent decisions will be determined by the economy’s performance. She also said it is unclear right now where the Fed may ultimately push interest rates.
Ms. George spoke as central bankers actively debate the timing of when to raise the short-term interest rate target from its current level near zero, where it has been since the end of 2008. Most central bankers say they support boosting rates this year in light of decent growth and solid gains in the job market. Giving pause to the press for higher rates has been pervasive weakness in inflation: the Fed has fallen short of its 2% inflation target for nearly three years, and price pressures are weakening, not getting stronger.
A number of officials have said the door to rate increases will open with the June meeting, although few have said they would like to see the Fed act at any given meeting. St. Louis Fed President James Bullard warned in an interview last week that if rate increases haven’t started by the end of the third quarter, the Fed may have waited too long.
Meanwhile, Chicago Fed President Charles Evans said in a speech earlier Wednesday the very weak inflation environment indicates the Fed should hold off on raising interest rates until next year.
Ms. George currently doesn’t have a vote on the policy-setting Federal Open Market Committee. She has long advocated in favor of raising interest rates, worrying that keeping rates very low risked a breakout in inflation and bubbles in financial markets.
Ms. George emphasized that modest rate increases would still leave the economy with a lot of central bank support. Boosting rates would be a “removal of accommodation,” not a “tightening” of monetary policy, she said.
Ms. George was largely upbeat about the state of the economy and doesn’t share some of her colleagues’ anxiety about inflation. Ms. George said there are signs that wage gains are heating up, while the collapse in oil prices is the main reason headline price indexes are so weak.
“While inflation is somewhat below the Fed’s 2% goal, I am not overly concerned with this shortfall. Instead, I see current and forecasted inflation as generally consistent with price stability,” she said.
Meanwhile, “momentum in the labor market will likely continue going forward,” Ms George said. “The U.S. economy is expanding at an above-trend growth rate, which I expect to continue through the end of the year,” she said, adding the strong dollar and foreign weakness could create some headwinds.