(Bloomberg) — Federal Reserve Bank of Kansas City President Esther George said she favors reducing the Fed’s $8.77 trillion balance sheet early on during the process of normalizing of monetary policy, as the central bank responds to surging inflation and a tight labor market.
“My own preference would be to opt for running down the balance sheet earlier rather than later as we plot a path for removing monetary accommodation,” George, who votes on monetary policy this year, said Tuesday to The Central Exchange, a group that promotes leadership development for women.
“With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook,” George said at the virtual event.
George, who has been among the more hawkish of Fed officials, didn’t specify when or how many 2022 rate increases she preferred in her prepared remarks. Fed policy makers believe a stronger economy and higher inflation could warrant rate hikes “sooner or at a faster pace” than they previously expected, according to minutes of the Dec. 14-15 policy meeting released last week.
A number of other policy makers, including Atlanta Fed’s Raphael Bostic and St. Louis Fed’s James Bullard, have called for a possible March liftoff of interest rates with shrinking the balance sheet shortly after that. “We are ready to act to make sure that inflation does not run away from us,” Bostic said in an interview with Bloomberg News.
While the omicron variant may soften economic activity in the near term, George expressed confidence the economy would continue to grow this year, supported by a strong labor market and pent-up savings.
“Even as the pandemic continues to influence economic activity, the time has come to transition monetary policy away from its current crisis stance towards a more normal posture in the interest of long-run stability,” she said. “Recent indicators point to continued strong demand even as the sharp rise in Covid cases linked to the omicron variant threatens to muddle the picture somewhat.”
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