WASHINGTON, Oct 18 (Reuters) - The U.S. Federal Reserve should not cut interest rates further and easing policy as insurance against economic headwinds risks increasing financial instability at a stage in the business cycle when policymakers have limited room for maneuver, Kansas City Fed Bank President Esther George said on Friday.
“My own outlook for the economy does not call for a monetary policy response,” George said in prepared remarks to an energy conference the regional bank was co-hosting with the Dallas Fed.
“While weakness in manufacturing and business investment is evident, it is not clear that monetary policy is the appropriate tool to offset the risks faced by businesses in those sectors when weighted against the costs that could be associated with such action.”
The U.S. central bank lowered borrowing costs to a range of 1.75% to 2.00% at its last meeting in September. It was the second rate cut this year, following on from another one in July, as the Fed aims to sustain the U.S. economy amid headwinds from slowing global growth and trade tensions.
George has voted to keep rates unchanged on both occasions along with Boston Fed President Eric Rosengren and has also pushed back on the idea that interest rate cuts may be desirable to boost inflation, which has repeatedly undershot the Fed’s 2% target.
Instead, George reiterated that moderating U.S. growth, low unemployment and low and stable inflation were all in line with her outlook for this year.
By contrast, Fed Chair Jerome Powell and several others have said they view the actions taken as prudent insurance against the impact of the U.S.-China trade war on the economic outlook.
George, who nevertheless said she was open to changing her monetary policy stance should downside risks spill over to the broader economy in a way that “fundamentally affects the consumers and shifts the overall outlook”, pushed back that such a pre-emptive strike was the right course.
“One potential cost is that such an insurance policy risks overheating the sectors of the economy that are already performing well,” George said as she also noted that cutting rates could cause levels of corporate debt and other vulnerabilities to become elevated by encouraging risk-taking and leverage.
“The ability of the Federal Reserve to offset any unintended effects related to financial stability at this stage of the business cycle seems limited,” she said.
Investors currently see an 80% probability the Fed will cut interest rates at its next meeting on Oct. 29-30, according to an analysis of Fed funds futures contracts compiled by the CME Group. (Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama)