Kansas City Fed President Warns ‘Abrupt’ Rate Changes Could Strain Economy

WASHINGTON–Abrupt changes to the federal funds rate could stress the economy and financial markets, with steady and well-communicated increases preferable given the uncertainty about how hard and fast rate hikes will hit business and household spending, Kansas City Fed president Esther George said on Monday.

With inflation at an 40-year record, George stated that “the case to continue to remove policy accommodations is clear” in remarks prepared to be delivered to a Missouri labor-management conference.

How fast interest rates should increase… is a question,” she stated. This was despite the fact that many of her fellow colleagues had already supported a third consecutive three-quarter point rise at the July Fed meeting. George voted against an increase in that amount in June and preferred the half point increase expected by the public until the weekend prior to the meeting.

” The pace at which the path is followed will have to be carefully balanced with the economic and financial market state,” George stated in what amounts the most blunt warning by a policymaker to suggest that the central banking system may be overdoing things.

Since March, the Fed has raised interest rates in an effort to reduce inflation. In just three meetings it has increased them by quarter points then half-point then in three-quarter point increments. The Fed has seen a dramatic shift in financial conditions, with higher mortgage rates for homeowners and a reordering in bond and stock markets.

” This is a historic fast pace at which rate rises are occurring for businesses and households to adjust to. More abrupt movements in interest rates may cause strains in either the economy or the financial markets,” stated George.

” Communicating the rate path is more important than how fast we get there” George stated, suggesting that she might be inclined to support a three-quarter point increase in interest rates when the Fed meets this July.

The financial markets expect a larger rise. However, economists and investors have raised concerns about the possibility that central banks will raise interest rates to the point of triggering a recession.

George stated that she was surprised by the emergence of a debate about recession “just four months after the Fed raised rates. Some analysts have even predicted that the Fed would need to start cutting its federal funds rate in the next year due to an economic slowdown.

The annual increase in consumer prices was 9.1 percent for June. This is the highest rate in over 40 years. The inflation data, reported by the Labor Department on Wednesday, followed stronger-than-expected job growth in June and suggested that the Fed’s aggressive monetary policy stance had made little progress thus far in cooling demand and bringing inflation down to its 2 percent target. Inflation could be a problem as rents have risen by more than 50% in 36 year.

A survey by the New York Fed released Monday showed that consumers’ expectations of inflation for the coming year were at a record 6.8 percent.

Yet, household inflation expectations decreased over the last three-year period from 3.9 to 3.6% in the most recent survey. While still well above the Fed’s target of 2 percent but in the right direction.

Recent economic statistics have also revealed that consumption spending is falling in inflation adjusted terms, with the large wage gains from the pandemic period beginning to slow down.

Economic growth could be negative in April-June, as it was during the first three months. This may raise concerns about a possible recession.