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Esther George on Why It's Time to Begin Adjusting QE

Kansas City Fed President Esther George hasn't changed her tune about the Fed's massive quantitative easing (QE) program, as she explained in an exclusive interview with FOX Business Network today (Tuesday).

"I think it is time to begin to adjust those purchases," she told FBN's Peter Barnes. "The labor market has shown now, for the last six months, pretty steady gains of close to 200,000 per month. That is a good indicator that there has been sustained improvement here and that I think it would be appropriate, given the size of our balance sheet, given the level of accommodation, that we begin to make adjustments that reflect that improvement as we go forward."

Launched last year, and dubbed QE Forever, the program is aimed at holding down long-term interest rates. It has fueled the recent housing rebound and record breaking stock-market rallies.

The FOMC member shared her worries about the "distortions" the central bank's loose monetary measures have caused. Noting inflation has remained in check so far, she added the Fed's policy "doesn't remove the risk of inflation."

George isn't calling for the Fed to completely turn off the spigot. "Until the economy completes its recovery, accommodative policy needs to be in place," George said.

But, her message was clear: the Fed cannot be complacent.

George is especially concerned about a notable move into "riskier assets" amid artificial stock market gains. But, she is not concerned about weak economic reports.

"I've observed during the recovery, as I have in other recoveries, that you get mixed data. What you have to do is look out into the next couple of years," George said.

As for when the Fed will start these "adjustments," George said: "I think that's a discussion the committee is going to have to have, about what is the right pace and what is the level of adjustment. So I'm open to engaging that with my colleagues, about the right pace. But I think sooner is appropriate to begin now, because we have a long way to go if we're going to do this in a gradual and a systematic way, to begin to return the balance sheet, to begin to normalize Monetary Policy."

Esther George: Her Historic Fed Move

Esther George is a hawk among doves – and a bold one at that.

George raised plenty of eyebrows and sparked concerns early this year when discussing the risks of the Fed's unprecedented stimulus programs.

In fact, at the Fed's first meeting of the year on Jan. 29-30, in a historic move, George dissented against the Fed's decision to continue its bond buying.

It was the first time in the Fed's storied 100-year history that a policy maker used his/her debut vote to dissent.

"She's got good Midwestern roots, a farm girl's common sense," Dallas Fed chief Richard Fischer told Reuters. "Voices like Esther's prevent (the Fed) becoming locked into-group thinking."

George is especially worried about creating fresh financial asset bubbles and the implications to the economy when Fed tapering begins.

"Policy choices that attempt to speed improvement in the housing and labor markets can be attractive given these circumstances. But this desire must be traded off against the need to foster long-term stability within our financial sector," George said back in January.

"On the one hand, today's policy settings are designed to encourage risk-taking and to stimulate much need growth across our economy. But on the other hand, experience has shown that pushing risk taking too far can cause the mispricing of risk, the misallocation of capital and the ultimate weakening of financial firms' balance sheets," George continued.

She has held that stance since.

Minutes from the Fed's latest meeting show George, along with St. Louis Fed President James Bullard, voted against continuing the Fed's $85 billion a month in Treasury bonds and mortgage back securities buying until the labor markets shows signs of sustainable improvement.

George dissented saying the Fed's "easy money" policies risk financial imbalances and would eventually lead to high inflation.

Esther George's Impressive Background

Presently, she is best known as "the hawkish KC Fed chief" that replaced her predecessor Thomas Hoeing, who dissented from each and every FOMC decision taken in 2010.

But George is more than the voice of dissent.

"She is a great listener," Julie Stackhouse, head of banking supervision at the St. Louis Fed, who worked with George for 15 years and remains a friend, told Reuters. "She is able to bring together individuals who sometimes have differences of views simply by being in the mix of the discussion."

Described as down-to-earth and likeable, George is also known for her tough side in sending lots of bad news to banks over the years.

She became president and chief executive officer of the Federal Reserve Bank of Kansas City and a member of the Federal Open Market Committee on Oct. 1, 2011. She became an FOMC voting member this year.

Before her appointment, George had been the Bank's first vice president and chief operating officer since August 2009.

A Missouri native, George joined the Bank in 1982, was appointing to the official staff in 1995, and has held various leadership positions with the Bank. From 2001-2011, she was executive vice president in charge of the Bank's Division of Supervision and Risk Division of Management.

In that position, she was responsible for the supervision and regulation of the District's 170 state-chartered member banks and nearly 1,000 bank and financial holding companies, as well as the Bank's discount window and risk management function.

During her years in banking supervision, George was directly involved in the Tenth District's banking supervision and discount window lending activities during the banking crisis of the 1980 and following the 9/11 terrorists attacks that rattled world markets.

As host of this summer's Jackson Hole, WY economic policy seminar, a forum for central bankers, policy experts and academics to come together to look at emerging issues and trends,
George acknowledged Fed Chairman Ben Bernanke won't be in attendance this year.

But, she side-stepped questions about the Chief's term or who his successor might be, simply saying, "We'll miss him."

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