George of the Fed calls for faster withdrawal of $ 8.5 trillion in assets and a “more normal” interest rate strategy

The Kansas City Federal Reserve Chairman said on Tuesday that the central bank should quickly cut its massive $ 8.5 trillion stack of bonds to help curb US inflation, the highest in nearly 40 years.

Esther George said the Fed’s efforts to reduce inflation would be more effective if the bank reduced its holdings of long-term bonds even as it gradually raised short-term interest rates. She made his remarks in a virtual speech at the Central Exchange.

George said the bank is expected to shrink its balance sheet at a faster pace than it did at a similar pivotal moment nearly a decade ago, as the United States recovered from a another strong recession.

“Overall, I think it will be appropriate to take stock earlier than the last round of tightening,” she said.

The Fed bought trillions of treasury bills and mortgage-backed bonds during the pandemic to lower long-term interest rates to record highs and stimulate more borrowing and spending.

Yet the economy has largely recovered, and the pace of inflation recently peaked at nearly 7% in 39 years – in part, some economists say, due to excessive stimulus from the Fed and the United States. the White House.

George said the economy didn’t need a lot of help anymore.

“Even if the pandemic continues to influence economic activity, the time has come to shift monetary policy from its current crisis position to a more normal posture in the interest of long-term stability,” he said. she declared.

The Fed is preparing to raise its benchmark short-term interest rate, which is now close to zero for the first time since 2018, and to determine how quickly to reduce its balance sheet. President Jerome Powell, in his nominating testimony Tuesday, pledged to keep inflation from taking hold.

If the Fed hiked short-term rates but were slow to shrink its balance sheet, George argued, the yield curve could reverse and lead to excessive risk-taking.

A reversal occurs when short-term interest rates exceed long-term rates. Low long-term rates can cause investors to seek higher returns on riskier investments.

“With robust demand, high inflation and a tight labor market, policymakers will need to tackle the appropriate speed and scale of adjustment across multiple policy tools as they work to achieve their long-term goals. in employment and price stability, ”said George. . “This transition could be bumpy. “

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