Low inflation? Nothing to worry about, Fed's George says

DENVER (Reuters) – Kansas City Federal Reserve Bank President Esther George on Sunday rejected the notion that the U.S. central bank should cut interest rates to try to boost low inflation, adding that doing so could create financial imbalances.

“In current circumstances, concern about low inflation seems unnecessary,” George said in remarks prepared for delivery to the National Association for Business Economics. “In the absence of more evidence that the downside risks may be realized, muted inflation alone would not warrant a policy response.”

In fact, she said, hitting the Fed’s 2% inflation target spot on is difficult, in part because global factors are in large part responsible for low U.S. inflation, she said.

“I find it more realistic to accept that there will be both temporary and persistent fluctuations around this long-run target and, as long as they don’t exceed a reasonable threshold — perhaps as big as 50 or even 100 basis points — they should be tolerated, depending on broader economic conditions,” she said.

That view is at odds with concern expressed by much of the Fed leadership over years of missing the central bank’s 2% inflation goal.

George dissented on both of the Fed’s interest rate cuts this year, in July and September, to a current target range of 1.75% to 2.00%.

Fed Chair Jerome Powell has described those reductions as an insurance policy against the effects of slowing global growth and rising trade uncertainty and says the broader economy is fundamentally “in a good place.”

“Should incoming data point to a broadly weaker economy, adjusting policy may be appropriate to achieve the Federal Reserve’s mandates for maximum sustainable employment and stable prices,” George said. But with inflation currently very close to the Fed’s goal, she said, “trying to quickly return inflation to 2 percent by adjusting interest rates could require aggressive actions that would misallocate resources and create financial imbalances.”