(Reuters) - Dismissing below-target inflation as “not a current worry,” Kansas City Federal Reserve Bank President Esther George on Wednesday called for further gradual U.S. interest rate hikes to head off unwanted inflationary pressures.
“Low inflation, in itself, is not a problem in an economy that is growing and operating at full employment,” George said in remarks prepared for delivery at an event in Kansas City, Missouri. The speech was not on George’s public schedule.
“In such an environment, it is desirable to sustain the economic expansion by avoiding overheating and financial market instability. The best way to do that is to gradually adjust policy rates to more normal settings.”
George, who does not vote this year on Fed policy, also took aim at the Fed’s 2 percent inflation target, which she had supported establishing in 2012.
“In hindsight, I think it has proven to be far more challenging than expected, both as a communications mechanism and a policy guide,” she said. “Too much focus is placed on achieving this specific numerical target when, in fact, inflation is likely to fluctuate around that target with deviations that occasionally might persist.”
The view that the Fed should not wholeheartedly pursue its inflation goal is anathema to many at the U.S. central bank, who say that to miss the target persistently is to undermine the Fed’s credibility.
Still, most at the Fed have said they expect to need to raise rates again in December, in the belief that with unemployment at 4.2 percent, prices pressures are likely building enough to bring inflation back to 2 percent in the medium term.
George, in her remarks on Wednesday, adopted a stronger tone.
“In the context of a growing economy at full employment, low inflation is not a current worry,” George said.
Reporting by Ann Saphir; Editing by Paul Simao