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Federal Reserve official "cautiously optimistic"

POSTED: February 5, 2013 7:00 a.m.
Alan Rusch/

Esther George speaks during the annual meeting in January of the Ellsworth-Kanopolis Chamber of Commerce.

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When Esther George joined the Kansas City Federal Reserve Bank in 1982, she found herself on the front lines of a farm recession that claimed thousands of crop and livestock producers, closed hundreds of rural banks and wrecked small communities.
Today, as president of the Kansas City Federal Reserve Bank, she is again on the front lines — this time as a voting member of the Federal Open Market Committee, which sets interest rates and other U.S. monetary policy. She has attended meetings for the past year she has been a regional president. In two weeks, George will attend her first meeting as a voting member, a job that rotates among the regional presidents.
 Did she learn anything in the farm crisis of the 1980s that is relevant to today’s recovery from the worst economic downturn since the 1930s?
“You have to take your losses,” George said in an interview this past week with the I-R.
George spoke Jan. 17 at the annual meeting of the Ellsworth-Kanopolis Chamber of Commerce. She appeared in Ellsworth at the invitation of local banker David Brownback, who is one of the three banker-directors on the Kansas City Federal Reserve Bank board.
The Kansas City Fed, one of a dozen regional federal reserve banks in the United States, oversees 170 state banks and 1,000 banks and holding companies in Kansas, Missouri, Nebraska, Wyoming, Colorado, Oklahoma and New Mexico.
George said part of her job is to listen to representatives from each of the region’s member states and then report those “real-life experiences” to federal reserve officials in Washington, D.C.
In the country, she said, people aren’t talking about the Gross Domestic Product and subjects only an economist could love; instead they’re worried about jobs and issues that directly affect their lives.
George said the economy has been growing in the four years since the “deep recession” of 2007-08; however, the recovery has been “bumpy and slow” and many haven’t benefitted from the improved times. Here are the reasons, according to George:
• Two-thirds of the U.S. economy is driven by consumer spending and millions of citizens lost their jobs during the recession. At the same time, consumers lost $6.5 trillion in wealth, much of it in housing, and have been cutting back on debt ever since.
“They’re not anxious to go out and borrow again,” she said. “We see this whether it’s high income people, low income people, high credit scores or low credit scores.”
• As a result, businesses are “hoarding cash” — afraid to invest in plants, equipment, additional jobs — because demand is down and “they’re sitting tight to see what we’re going to do with our spending,” George said.
• The housing market is stronger. Values increased 5 percent in the past year; car manufacturers produced 14.5 million vehicles — the most in five years — and the unemployment rate has ticked down because the county is adding more than 150,000 jobs a month. There also are other signs of improvement — still, uncertainty fills the board rooms and offices of corporate decision makers, thanks to concerns over the possible actions of Congress, potential changes in the tax laws and regulatory reform.
“It causes us to hold back until we know what the rules of the game are,” George said.
Despite the caution flags, George said she is optimistic about the future economy of the United States. She predicted growth in the range of 2 to 2.5 percent and a decrease in unemployment from 7.8 percent to 7.2 or 7.3 percent by the end of the year.
Then there’s the actions of the Federal Reserve to push the economy forward.
At its December meeting, the federal reserve’s policy committee decided the central bank would keep interest rates near zero until the unemployment rate reaches 6.5 percent. The federal reserve also plans to continue buying government securities to stimulate economic growth. George said the federal reserve now holds an unprecedented $3 trillion in assets, compared to $900 billion five years ago, and is on track to have $4 trillion in assets by the end of 2013.
“The federal reserve wants people to be able to go back to work. The federal reserve wants the economy to grow, but there are unintended consequences to what we’re doing and those are the things I think about,” George said.
What happens to individual savers and others, including small banks, that are inadvertently punished by the federal reserve’s policies? What about the boost low interest rates gives to some assets? Farmland, for instance, continues to increase in value.
“Is that an asset bubble? I don’t know,” George said.
But she thinks the past has lessons that apply to today. She pointed to the 1970s, when the federal reserve eased its policies and spent the next decade fighting inflation. Then, as now, farmland values soared and farmers were caught in an economic tangle created by a variety of factors, including inflation and rising interest rates.
 “There are no free lunches and there are always costs to every policy so I think carefully about what those long-term issues might be and how we ought to be thinking about those today ... I think we would be unwise to ignore what we have set in motion here,”
George said.

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