Fed’s George says weak GDP no reason to hit policy brakes

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Despite a recent weak read on economic growth and cooling auto sales, Esther George, president of the Kansas City Federal Reserve, said that the US economy is on track to grow at “a slightly above-trend rate” and that the central bank’s current path of gradual rate increases remains the right one in her view.

Ms George, a reputed hawk, on Tuesday noted the sluggish read on GDP from the first three months of 2017 despite a tight labour market, with unemployment touching a 10-year low last month. In another sign of possible weakness, US auto sales have also been sliding.

But, she said, the weakness does not call for the Fed to hit the brakes on the process of normalising monetary policy, for now, according to prepared remarks from a speech at the University of California Santa Barbara’s annual South County economic summit.

“All told, while the recent GDP report and auto sales may be flashing yellow, numerous other indicators remain solid green….Given the strength of fundamentals across a range of sectors, I expect the economy to continue growing at a slightly above-trend rate.”

She said that some of the apparent weakness could be attributed to “unusually mild winter weather” that weighed on consumer spending and the inherent “dips and spikes” of economic data, as well as “residual seasonality” that has contributed to unusually weaker readings in the first quarter than the rest of the year.

The Fed has already moved to increase rates once this year, and while it held fire during its latest meeting in May, it is projecting another two moves this year. The markets are fully expecting a rise to be announced at the central bank’s next meeting in June, according to Fed funds futures.

Ms George added:

“Last week, the FOMC took no action to change policy, although it remains on a path to remove accommodation in a gradual manner. Given my own economic outlook and assessment of the balance of risks, I support this policy path.”

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