Jackson Hole 2022: Kansas City Fed President Esther George speaks with Yahoo Finance [Transcript]
Esther George, president of the Federal Reserve Bank of Kansas City, joined Yahoo Finance on the sidelines of the annual Jackson Hole symposium discuss the Fed's firefight with inflation amid recessionary concerns.
Below is a transcript of her appearance, taped on August 24 and aired on August 25.
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BRIAN CHEUNG: Yahoo Finance on site here, the Jackson Hole Economic Symposium. I'm sitting down here with Kansas City Fed President Esther George. President George, how are you?
ESTHER GEORGE: I’m well, good to see you, Brian.
BRIAN CHEUNG: Great to see you too. Well, first of all, it's great to be back here in person behind the backdrop of the beautiful Tetons here, but of course, coming at a time of a lot of cloudiness, in terms of the economic outlook. Just kind of curious, the big picture question is, of course, inflation. What is your outlook on whether or not inflation will get down to where you'd like it to be by year end or next year?
ESTHER GEORGE: I don't think it will get down to where we'd like it to be by year end. But I think what we're dealing with right now, Brian, is what we've seen for a while, and that is a imbalance between demand and supply. So July looked like there was some easing in those price pressures, but certainly not enough that you would say, we're in the right direction. So I think we have more data to see. And I think we have more work to do, to begin to see that trend move down.
BRIAN CHEUNG: So when you say easing of price pressures that may have been maybe a reading on the month over month figures plateauing between June and July. But of course on a year over year basis, 8.5% higher than they were last year, what is the proper way to think about inflation data because you have a lot of people wondering what is the right way to read this, all they see is what's happening at the store, which of course is a lot worse than it was a year or two ago?
ESTHER GEORGE: Now it's true, headline inflation is very important. Because when you pull up to the gas pump, what you see is that high price of gas, so when that came off a bit, that provides some relief. But on the other hand, food prices have not yet shown that kind of downward trend when people go to the grocery store. So it's a very important factor in how people feel about the economy. There's sentiment around that and how they spend their dollar.
BRIAN CHEUNG: Now, as the Fed raises interest rates, the question has been whether or not you can pull off this soft landing by which you can get inflation down without triggering a sharp uptick in the amount of unemployment in this country, which we haven't seen yet for the record. But wondering how you feel the progress support is on the Fed’s job doing that?
ESTHER GEORGE: So we're still pretty early. Remember, we've done a lot in less than six months to begin that process. And so because of the lags with that policy, again, because of the additional work we have to do, I'm not sure we'd expect to see that turn around very quickly, just yet.
BRIAN CHEUNG: Now, obviously, you know, the lag policy. I want to get to that in a second. But just kind of rewind in terms of the soft landing question. You mentioned what you've done already, in the last six months, four consecutive meetings of interest rate hikes. How do you think about the bite of inflation? Again, we've seen maybe encouraging signs in the July report, but not to ask you is that the March or the May interest rate hikes but how do you think about, you know, the lag impact of it? Is it six months before it starts to bleed through? How does that work?
ESTHER GEORGE: So we don't know exactly. I think typically, we've thought about six to 12 months of lag in that. And of course, we saw those tighter financial conditions hit pretty quickly mortgage rates, for example. But there are other sectors of the economy that will be digesting this movement in rates. At the same time, next month, we start the full rolloff of our balance sheet. So I think as I watch the combination of these rate hikes and balance sheet coming down, it's going to be important to see how the economy adjusts to what the Federal Reserve is doing.
BRIAN CHEUNG: So on that point, it's kind of a tricky thing with timing, because not only is it imprecise, by which the impact of those rate hikes will start to bleed through to inflation. But you're also reacting to inflation data that is in and of itself, lagged by about a month or so. So how do you kind of think about those things I've heard Fed Governor Bowman say something to the effect that we have to keep in mind that these things are often revised, the data is often revised, how does that factor into your policymaking decisions?
ESTHER GEORGE: Well, of course, that's always true. You can see the data be revised. But I think for a regional Fed President like me, one of the advantages I have is data on the ground. And by that I mean, our business contacts, people that we are talking to on a regular basis to try to get an early read of what they are saying. And I will just tell you right now, they are continuing to see price pressures, they are continuing to have problems hiring people. So that tells me that the effects of those rate increases have not come through yet and it is likely that we will need to do more before we see that demand begin to cool.
BRIAN CHEUNG: So we hear this term of easing financial conditions, tightening financial conditions, kind of jargony. You talked about, you have on the ground experience and talking to folks. You've noticed that over the course of let's say, the last eight weeks or so, although it's kind of not been the case for the last two weeks, that financial conditions have eased, mortgage rates have not continued to go higher. Maybe borrowing costs for businesses have also kind of plateaued a bit. has the easing of financial conditions impacted the inflationary story in the 10th district?
ESTHER GEORGE: So I don't think we have seen the effects yet. But remember, we are operating in an uncertain time, the volatility that we see in markets. It will be important for us to communicate clearly the path ahead, so that those financial conditions can tighten alongside those rate moves, and then we can begin to see demand cool.
BRIAN CHEUNG: Were you surprised after the July meeting to see financial conditions actually kind of reverse a bit? Well, I guess it was after the June meeting. But yeah.
ESTHER GEORGE: It's hard to know always, you know, what factored into that decision. But I think, again, what we want is to see the communication that we are on a path to higher interest rates, bringing inflation down, be priced into the markets.
BRIAN CHEUNG: You mentioned the balance sheet roll off earlier. So as you mentioned, it's going to kind of get up to full speed in September. But I guess the natural question, is that still a process by which it's maturing assets that are rolling off the sheet. If the Fed wants to be more aggressive on interest rate hikes to take inflation down, why doesn't the Fed get more aggressive on the balance sheet roll off as well by maybe actively selling securities?
ESTHER GEORGE: So I would say we're doing a lot more if you think about the last cycle of removing accommodation, trying to bring the balance sheet down, we did it under very different conditions. Now, we have a balance sheet that's considerably higher, the pace of that run off is going to be higher. And we have been far more aggressive in these interest rate hikes. I think the combination of that, given the unprecedented nature, both of the shock, but how we're seeing the economy unfold, really means that you have to watch carefully how the pace of that tightening is affecting the real economy.
BRIAN CHEUNG: I want to ask about kind of dark horses in this situation, because we're watching a slowdown in China, recession worries out of the eurozone, UK inflation very high. Do you worry about spillover effects of what's happening outside of our borders, that could actually affect the Fed’s ability to do its job?
ESTHER GEORGE: Yeah, I think it's important always, I mean, we live in a global economy in many respects. So as we watch what's happening in significant economies, like China, and Europe and the UK, we will have to be mindful of what impact that has on the US, even though our mandate is squarely focused on this domestic economy.
BRIAN CHEUNG: Now, financial stability is something I imagine that you're watching as well. It's been a very volatile year in terms of financial conditions, and how that's impacted possible asset bubbles or just risk taking in the economy. But wondering kind of where you see in August, the state of financial stability.
ESTHER GEORGE: So we've been keeping a close eye on financial stability. And I think one of the things I'm watching very carefully again, we're talking about what's happening in financial markets. So the quantitative easing that we undertook boosted asset values. As we began to remove some of that accommodation, I think we should expect that evaluations could adjust. And that could have impacts to the market. So how the banking system fares in this how other sectors of the economy fare will be important to keep an eye on.
BRIAN CHEUNG: Now, I know that Fed officials don't comment on fiscal policies, but there's just been a lot of interest in the Inflation Reduction Act, the name of that bill itself already implies a pretty important weight on just what's happening in the macro to average Americans,. Just wondering if you've assessed or thought about the windfall of that package in the near term, and whether or not that kind of weighs on your policy choices in the immediate future.
ESTHER GEORGE: So I haven't studied it in depth to comment on it. But generally, as we take fiscal policy, and depending on whether it's a short term effect, many of those things take place over a period of time. So they don't have an immediate effect on the economy. But any of those fiscal actions, we will take into account in thinking about how the economy will unfold, what growth will look like in the years ahead.
BRIAN CHEUNG: And then just another kind of fiscal policy point that's relevant today, the forgiveness of the $10,000 in student loans for most borrowers, as announced by the Biden administration. Just wondering if you have any thoughts on, you know, the inflationary implications of of that type of thing?
ESTHER GEORGE: Yeah, I haven't looked at it. So wouldn't be fair to comment on. I don't know, that, again, given the total size of that relative to what we're looking at, in terms of the total size of the economy and the imbalances we see there, that I'd have much to say about that at this point.
BRIAN CHEUNG: And a final question, just to kind of bring things full circle here for the many Americans that maybe don't watch the 10-year yield or don't know the nuances of quantitative tightening, what is the message on kind of what the Feds doing with inflation continuing to run pretty uncomfortably high.
ESTHER GEORGE: So our goal is clear. We are trying to get back to 2% inflation as quickly as we can, without doing damage to the economy. That means we will continue to be watching what's happening in the job market, what's happening to inflation as it comes down. But I think very clear-eyed, at least in my view, that we have got to get back to 2%. That will be, that will be the victory lap in terms of achieving price stability.
BRIAN CHEUNG: Okay, Kansas City Fed President Esther George here, in person. Thanks so much for joining us. Appreciate it.
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