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Fed’s George Says Case for More Rate Tightening Is ‘Clear-Cut’

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(Bloomberg) -- Kansas City Federal Reserve Bank President Esther George said the US inflation rate remains far too high and policy makers have a “clear-cut” case for continuing to remove monetary support.

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Still, officials should prioritize steadiness over speed as they proceed, said the Fed official, who has recently expressed caution about the pace of the interest-rate increases.

“The case for continuing to remove policy accommodation remains clear-cut,” George said Friday in remarks prepared for a virtual event organized by the Peterson Institute for International Economics. “The key questions are by how much and how quickly.”

Policy makers need to observe the economy carefully to determine how much more tightening is required, and it may be difficult for them to identify when rates have become restrictive, said George, who votes in monetary policy this year.

“We will have to determine the course of our policy through observation rather than reference to theoretical models or pre-pandemic trends,” said George, who did not specify in her remarks the size of the rate increase that she would support later this month. “Given the likely lags in the pass-through of tighter monetary policy to real economic conditions, this argues for steadiness and purposefulness over speed.”

Fed officials are aggressively lifting interest rates and signaling they won’t back down as they battle an inflation rate running near 40-year highs. Policy makers could raise rates by 75 basis points for a third straight meeting when they gather next on Sept. 20-21, a scenario investors see as the most likely outcome.

Powell has said policy makers’ decision will depend on the “totality” of the economic data they have on hand, including the release on consumer prices for August due Sept. 13. Economists surveyed by Bloomberg forecast an 8.1% rise for the 12-month period versus 8.5% in July.

“The rise in inflation has been very broad-based,” said George, noting that core inflation readings are rising.

In addition to its rate increases, the central bank is also shrinking the size of its balance sheet by a maximum of $95 billion a month as it removes the support offered during the pandemic. However, there is a chance the Fed could face challenges as it shrinks its balance sheet, said George, citing research finding that financial markets can start to depend on the liquidity added by the central bank’s asset purchases.

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