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Jackson Hole 2021: Kansas City Fed President Esther George speaks with Yahoo Finance [Transcript]

·Reporter
·13 min read

Esther George, president of the Federal Reserve Bank of Kansas City, joined Yahoo Finance on the virtual sidelines of the annual Jackson Hole symposium to discuss the impact of the Delta variant on the U.S. economy and how the Federal Reserve is responding.

Below is a transcript of her appearance, taped on August 25 and aired on August 26.

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BRIAN CHEUNG: Joining us now is the Federal Reserve Bank of Kansas City President Esther George. President George, how are you?

ESTHER GEORGE: I'm well. Good to see you, Brian.

BRIAN CHEUNG: So just want to hop right into it. Obviously disappointed that we had to move this to a virtual format this year due to the spread of Delta in Teton county — not that that says anything about how the Fed is thinking about Delta. But I want to use that as a springboard to jump into how you're viewing the economic outlook. Just wondering broadly if the recent rise in Delta over the last two weeks has impacted your view on the trajectory of the economic recovery, if you can kind of provide a little bit more color on that.

ESTHER GEORGE: I think certainly with the rise in this variant, you have to think about what kind of a risk does that pose to a baseline outlook for the economy that suggests we're going to have strong growth, continued labor market gains. I think at this point, the data still shows the economy's on track as I listened to our contacts in this region. We continue to hear a fair amount of optimism about their ability to operate through challenges like the Delta variant. I do expect that we could see, though, again as we have, some sectors of the economy will be more affected than others. So people may decide that trips they're going to take might be deferred, that some other activities that require more contact-intensive nature would be put off. But by and large, I think, unlike what we experienced last year, people have mechanisms to continue to interact with the economy in a way that we didn't before. And so that gives me some confidence in the outlook that we see, that we could continue to push through this.

BRIAN CHEUNG: Now, President George I want to drill down into the price stability side of your mandate. So a big concern right now for Americans who maybe don't follow the Fed every day is: inflation. Just taking a look at the prices that they're paying for everyday things, the ways that they're interacting with the economy. How does Delta weigh on inflationary pressures from your view over the short to medium term? Because there's a lot of talk about these inflationary pressures being transitory but if Delta lasts, especially in other countries that are big exporters to the United States, maybe that means prices will remain persistently higher. How are you viewing that kind of dynamic.

ESTHER GEORGE: I think we have to keep an eye on that, because we know this pop up in inflation, while I expect it is going to be temporary and that there will be adjustments in the economy that allow that to moderate, it's costly particularly to low-income people that have to pay those higher prices right now. So certainly it is something you watch to see, does the data suggest that the expectation of moderation is going to happen. And I think we see some tentative signs that that's true. But of course, if you continue to have supply constraints and strong demand, you might expect that those will persist more through this year or longer than we originally anticipated.

BRIAN CHEUNG: So all that together, how is that guiding your approach to asset purchases? The Feds been buying about $120 billion a month through the quantitative easing program, are you advocating to kick off slowing those purchases beginning in the next meeting, which would be in September?

ESTHER GEORGE: So as I judge the guidance that the committee has offered around “substantial further progress” toward its goals, that, in my judgment, we are reaching that point. We've certainly seen strong job gains which tells us the labor market is moving forward. Certainly the levels of inflation right now, with our view that we've met the criteria for our inflation objective. So I think it is time to begin to ease back from the amount of accommodation that's going into the economy given the outlook that we have. So I would be in favor of beginning that process sooner rather than later. And of course we'll be having that conversation with my colleagues at our September meeting.

BRIAN CHEUNG: And obviously there's still a month between now and that meeting, but is there anything that you would need to see in that upcoming employment report covering the month of August, or in the inflation data, or in just the number of COVID cases through Delta that might convince you to maybe wait on some sort of taper announcement?

ESTHER GEORGE: So I think the conditions that we've seen so far would have to change dramatically. Again, the job gains that we've seen so far, even in the face of the Delta breakout, have been positive. So certainly we'll be watching carefully when we get another jobs report to see if something's changed that, whether the going back-to-school process is affected in a material way. But I think just looking at the nature of what the economy is running into right now, the demand side looks to be strong. It is the supply constraint part. And frankly, the policy tool of asset purchases is probably not going to affect that.

BRIAN CHEUNG: So actually that's a good point that you bring in maybe a good segue to talk about the labor market side of things. So about two weeks ago you emphasized in a speech that with almost 6 million people still out of labor force compared to pre pandemic levels that there's still considerable slack, at least on the labor market side of your mandate. So based off of what you said, how does tapering interact with that? Is it some sort of reaction where if hiring firms are looking at what the Fed is doing and slowing its asset purchases, that's going to have an impact on their ability to rehire these people that are still on the sidelines? Or is the lack of impact there informing your wiggle room to make this adjustment without affecting that pace of recovery?

ESTHER GEORGE: I think if you look at the, again, the outlook, and the data that we see coming in, it suggests that the economy has a good trajectory on it right now, absent some shock that we don't anticipate. And I think in that sense, pulling back on asset purchases does not tighten policy, we will continue to have negative real rates. That tapering process continues to provide some accommodation along the way, until it ends. And so I don't see it as a material issue in the labor market advancement, which we want to see. We want to continue to see that slack be removed, the jobs come online. And if that changes in some way, obviously, the Committee will be attentive to what that means for our outlook and for reaching our objective for maximum employment.

BRIAN CHEUNG: So when the time does come to begin the taper process, from your vantage point, how would you like the tapering to go down, if you will? Would you like to bias the slowdown more towards the mortgage-backed securities, because of the hot housing market that we're seeing, as opposed to U.S. Treasuries? Would you like to have the taper done after a certain amount of time, how would you like to structure the mechanics of the actual taper when that does happen?

ESTHER GEORGE: So for me, Brian, the most important part of this is having a conversation that starts the process, and I think I'm open minded to the debate around how fast, how the purchases unwind. Remember we didn't go into this asset purchases by targeting the housing market and so how much impact that would have if we try to adjust in a particular way, I think is less clear to me. So I think the process of getting started, and being attentive to progress that the economy's making, so that we are adjusting policy accordingly, is where I'm going to be focused.

BRIAN CHEUNG: So I know that it's been described in some cases as, trying to “normalize” policy, but of course “normal” is dependent on who you're asking. Tapering though, is largely perceived to be a means to at some point raising interest rates along that line. So markets are paying close attention to this, Fed watchers are paying very close attention to this. So what's your thinking on how any sort of movement on taper would impact how you're thinking about the timing of liftoff, given your economic forecasts over the medium term?

ESTHER GEORGE: I think it's important to remember that the conditions that cause the Fed to think about the amount of accommodation is different than mechanically connecting the two policy tools that are in play right now. And so the end of asset purchases does not have a mechanical link to the lift off of interest rates. What will have, I think, influence on that decision of course is going to be where we judge the labor market to be at that time relative to our mandate for maximum employment, how inflation has settled out. Those are going to be really our markers in deciding when it's time to adjust that policy rate.

BRIAN CHEUNG: And this brings up the broader question of how challenging Fed communications are right now, because you will have to submit an economic forecast and a set of dot plot projections in that next meeting in a month or so. So, there is a lot of, I think, worry, and actually the minutes outline that some members of the committee feel this way as well, a conflation between how tapering and eventually raising interest rates would work. So do you feel like there's a communications challenge with what the Fed is trying to pull off right now especially just given the speed of all of this, it's fairly unprecedented the speed by which you have to assess all these things.

ESTHER GEORGE: So certainly, it's more complicated to have multiple policy tools. And it does put particular attention on how clearly we communicate, and so I think you will see that. I think the chairman, through his press conferences at the end of every meeting will be attentive to that. The minutes and the other communications that will come out will remind the public of what the markers are for the committee in doing that. And of course our forward guidance, which is embedded in the policy statement, is a reminder too when liftoff for interest rates would occur — based on, again, where we judge those mandates to be.

BRIAN CHEUNG: With regards to tapering, is financial stability an element that's driving your preferred policy path for that? A lot of people are noting reach for yield behavior, you take a look at the stock market rocketing up. Is that a big reason why maybe you're advocating for a pullback sooner than later?

ESTHER GEORGE: So when I think about financial stability, Brian, it's an issue, it's a condition that allows the economy to perform in a stable fashion, allows the committee to reach its objectives. Without financial stability, we won't be able to do that. So of course, the Federal Reserve is attentive to those financial stability risks, looking at the vulnerabilities in the economy. And I think being mindful of using interest rates to address those is not necessarily the best tool. It is important, though, that those be addressed in some way. You see a lot of attention on that, not always ones that the Federal Reserve can address, but essential nonetheless, if we're going to achieve our mandates for this economy.

BRIAN CHEUNG: So I want to move to the theme of this Jackson Hole conference even though we're not in Wyoming — although I see you're still keeping with the theme with your moose pin so I do appreciate that. But when it comes to this theme that you chose: “Macroeconomic Policy in an Uneven Economy,” and worth pointing out that it is the Kansas City Fed that puts this symposium together, how'd you land on that theme of uneven?

ESTHER GEORGE: Well, I think this was an extraordinary shock to the global economy. And I think one of its characteristics is looking at how unevenly that shock fell, and both the sectors of the economy it affected — so think about those contact-intensive sectors versus the goods production part of our economy, think about geographically, around the world, how that has fallen unevenly. So many aspects of this shock really motivated us to think about, what does that mean as macroeconomic policies, both fiscal and monetary policy, began to support and respond to a shock like that. And so I think you will see in the papers that will be discussed at the event, some insights on what that means, how those policies interact with that unevenness. And I think, taking into account that there were already structural elements in our economy that were uneven and to what extent this shock made those worse or affected them in other ways.

BRIAN CHEUNG: How does the theme of an uneven economy work with the Fed;s new framework unveiled last year with regards to allowing inflation to moderately overshoot its 2% target if it means you can get more gains in the labor market recovery, especially within the context of what we're facing, where we know, low-income, Black and Hispanic workers were more adversely affected than other types of comparable demographics, do you think that that is a big driving component of the motivation to pick that theme as well?

ESTHER GEORGE: Well it was a motivation in our framework to describe how the committee would think about monetary policy and certainly taking into account the experience of the last recovery, where inflation was low and job gains came over a long period of time. And so the language about “broad and inclusive” speaks to the question you’ve asked. The motivation for the conference, of course, was looking at this shock in particular. And we do see that in labor markets today. You had seen a disproportional impact on those parts of the economy that were service-related, that had the inability because of this virus, to be able to resume work in the same way that other parts of the economy did. So I think that aspect and how policy interacts with that is going to be the kind of discussion that we want to have this week at the conference.

BRIAN CHEUNG: All right, well that was Federal Reserve Bank of Kansas City President Esther George, thanks again for joining us. Hopefully we can see you again in person next year, I heard a rumor about these Kansas City Fed-branded boots, so hopefully I can see those in person again sometime in the future. Thanks again.

ESTHER GEORGE: We'll count on it. Brian, thank you.