KC Fed President Esther George warns of unknown risks with long-term low interest rates
The Kansas City Star
Steady slow growth of 2 percent is on the horizon economically this year, according to Esther George, president and CEO of the Kansas City Federal Reserve.
George offered her economic outlook today at The Central Exchange, an organization that promotes women in business and philanthropy in the Kansas City area.
George, the first woman president of the KC Fed, has impressive numbers of women executives in her offices, with seven of 10 top executive spots now held by women and one-third of the director seats filled by women.
On the economy, George characterizes the four-year recovery as slow and uneven, with still high unemployment of 7.8 percent.
As consumers have tightened their belts and reduced debt, the result is less consumer demand and constrained GDP growth. Simultaneously, corporations have conserved cash to strengthen their balance sheets.
What concerns her are the continuing “emergency” measures taken by the Fed to help the economy recover and the unknowns of consumers seeking higher returns in potentially risky investments.
As one of the five voting Fed presidents on monetary policy this year she may be a voice to call for changes.
With interest rates near zero and an announced intention to keep them low unless inflation heats up, George warned that she is keeping her eye on unknown risks that may be on the horizon.
While she clearly supported the Fed’s extraordinary moves during the worst of the recession, now she is concerned that a prolonged period of zero interest rates may “substantially increase the risks of future financial imbalances and hamper attainment of the 2 percent inflation goal in the future.”
Low interest rates are changing investors’ behavior as they reach for higher returns, possibly taking on new risks. “The longer-term consequences are not well understood.”
“Like others, I am concerned about the high rate of unemployment, but I recognize that monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it. I have highlighted the risk of financial instability and the risk of higher inflation because, although some say they are unlikely, history shows that becoming too sanguine about either can lull us into thinking we can avoid them.”