Kansas City Federal Reserve Bank President Esther George Tuesday night argued that there are enough positive signs in the economy recovery for the central bank to begin preparing the public for the eventual return to a more normal monetary policy environment.
“There is a point at which zero interest rates will, necessarily, need to be a thing of the past,” George said during a question and answer session following a speech at an agricultural symposium in Kansas City, Missouri. Her remarks were broadcast via an audio feed.
“The economy today is showing, in my view, the sort of strength that warrants preparing markets and preparing the public for that eventuality,” she added.
George will not be a voting member of the Federal Open Market Committee until 2016.
Taking the target federal funds rate out of the zero lower bound, where it has been since December 2008, is an important move, she said, as is seeing how the economy reacts to the action.
Normalizing monetary policy will require “careful communication,” George said, and the Fed will have to describe how the central bank will respond to incoming data and improvements in the markets.
“I think no one wants to see rates rise rapidly,” she said, which makes effective signaling that much more important.
As the Fed gets closer to ending its asset purchase program – indications from the FOMC are that the bond buying will be completely wound down after the October policy meeting – the FOMC must begin to address the question of “what is the path of interest rates as we look forward,” George said.
She said it will be a function of how the economy evolves and “preparing the markets for that eventuality,” something that will be “no small task.”
George also highlighted the risk to financial stability from the monetary stimulus pumped into the system by the Fed and central banks in other advanced economies.
“That liquidity is searching around the globe for a place to rest and to earn a yield,” she said, “and so looking to see where are those excesses, that is really the substance.”
Identifying if an asset bubble is big enough to derail the economy is not easy, George warned, noting how excesses in the housing market “were not so obvious,” and went undetected by the FOMC, before the meltdown occurred.
George said the slowdown in China’s economic growth is an issue that policymakers around the world are monitoring, adding that the Fed is also keeping an eye on the situation in Europe “to see how that economy is unfolding as well, and what its implications are for the U.S.”