JACKSON, Wyoming (MNI)- The Federal Reserve's continuing easy monetary policy could have long-term "painful consequences" if an exceedingly difficult exit is not accomplished successfully, Kansas City Federal Reserve Bank President Esther George said Friday.
In a speech to the Wyoming Business Alliance in Jackson, Wyoming, George also said that other risks are apparent due to the Fed's highly accommodative monetary policy stance, and that a large balance sheet "will make it more difficult for the FOMC (Federal Open Market Committee) to respond in the way that it might normally have responded."
"Careful thought has gone into the exit, yet as we continue to grow the size of the balance sheet, my concern is if that does not go as we hope, we might risk longer term inflation expectations moving higher," George said.
Furthermore, those "reaching for yield" due to the Fed's easy money policies are "particularly vulnerable to the point at which interest rates must rise," George said, and "in the long term, that could require a painful adjustment."
In addition, due to economic headwinds out of the Fed's control, such as tight fiscal policy, continued weakness in Europe, and structural changes in the labor market, George said in an audience Q&A session following her remarks that she "can't determine exactly how much the Fed is effecting the economy."
"We have yet to see, for example, with the boost in equity prices, any obvious or consequential impact on the real economy in terms of consumption," George said.
"I assume that may take longer to see. Much of that wealth may be going to those who have less propensity to spend," she said.
In another response to a question from an audience member, George said she doesn't "know how the markets will react to the Fed's exit."
George, a voting member of the FOMC this year, has been the lone dissenter during the last three meetings, but while she disagrees with the Fed's continued easing policies, she did say that "dissenting is not to suggest that I think this country needs higher interest rates ... or even normal interest rates right now."
Rather, George hopes "the opportunity will be there, that we can begin to make this exit, can begin to allow the markets and the economy to take over."
On the current status of the economy she said that "on the whole ... the recovery continues," and she expects "around 2% growth for the rest of the year."
The housing recovery "has been particularly encouraging," and is beginning to gain momentum.
"The demand for housing is coming back, so housing prices are beginning to firm ... and if that continues we should be beginning to see the advantages come through in terms of the growth of the economy," George added.
On the labor market, George said the 200,000 payrolls growth average over the last half year "is a pace that is sufficient to keep up with population growth and even to bring the unemployed back into the job market."
George did cite several headwinds to this recovery, including the weakness in Europe and the current U.S. fiscal policy.
"We have seen growth slow because of the sequestration ... and I expect that the impact of those we will feel in the second and third quarter and then that will begin to wane as the year goes on," George said.
Structural changes in the labor market are also effecting the economy, though the negative effects to growth are subsiding as the economy strengthens.
George noted, "The employment picture is getting better," and "as new jobs come on we should begin to see long term unemployed, that number should begin to come down."
Still, she said, "The factors driving labor market composition changes are beyond the scope of monetary policy."
--MNI Washington Bureau; tel: +1 202-371-2121; email: jnewell@mni-news.com
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