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Key hawkish Fed member backs pause in central bank rate hikes

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Key hawkish Fed member backs pause in central bank rate hikes

The Federal Reserve should pause its gradual interest rate increases and wait to see how the economy performs in the coming months, Federal Reserve Bank of Kansas City President Esther George said Jan. 15.

Her stance is notable given that George is often viewed as one of the more hawkish members at the Fed, meaning she is more likely to favor continued rate increases.

She echoed the recent tone of patience from her colleagues, including Fed Chairman Jerome Powell, who has emphasized that the Fed can take a wait-and-see approach to evaluate to what extent incoming economic data weaken.

George, who votes on the Fed's rate-setting committee this year, said it "might be a good time to pause our interest rate normalization."

"It is possible that some additional rate increases will be appropriate," George said in prepared remarks. "But making that judgment is not urgent and should depend on a careful look at the data and gathering additional insight into where our destination is, how much further we need to go to reach it and how quickly we should get there."

Fed officials have penciled in two rate increases for this year, down from their earlier projection of three. But investors have grown skeptical of whether the Fed will continue tightening amid an expected deceleration in global growth and inflation showing few signs of unhealthy increases.

The "outlook for the economy appears favorable," George said, noting that the risks to the outlook are two-sided.

The upside risks include that the U.S. economy may continue to grow beyond its potential, potentially leading to further labor market tightening and an increase in wages "that are out of line with productivity growth." The latter development, she said, could lead to companies passing on their increased labor costs to consumers through higher prices. It is possible that the U.S. "could be on the cusp of an undesirable increase in inflation," she said.

But other factors could drag the economy down, she added, pointing to a stronger dollar potentially harming exports and more uncertainty about the global economic outlook, partly due to increased trade tensions.

Fed officials should also "remain sharply aware" of the lagged effects of their past rate increases, George said, cautioning that not doing so could lead to the central bank tightening policy too much and setting the stage for an economic downturn. She also noted that the Fed's simultaneous trimming of its $4.1 trillion balance sheet complicates the issue further and gives the Fed more reason to be patient.

Meanwhile, Minneapolis Fed President Neel Kashkari reiterated at an event in Rochester, Minn., that the Fed should avoid hiking rates because the labor market appears to show that it has more room to strengthen. Kashkari is seen as one of the Fed's most dovish members and dissented on its three rate hikes in 2017, though he does not vote on monetary policy this year.

"If inflation is low, there's no need to tap the brakes prematurely," Kashkari said. "Let's let the economy continue to strengthen. Let's bring more workers off the sidelines. And if wages really pick up, and if inflation starts to pick up, we can always raise rates then. There's no need to snuff the economy before it really heats up."