Esther George Calls Big Fed Hike ‘Abrupt,’ ‘Unsettling’

Esther George is a hawk.

Or at least that’s what everyone thought, until she dissented in favor of a 50bps rate hike at this week’s historic FOMC meeting, at which policymakers, sans Esther, agreed to the largest increase since 1994.

The move wasn’t really a “surprise,” though. Although officials were in the pre-meeting quiet period, they conveyed their intentions through the Wall Street Journal‘s “Fed whisperer,” Nick Timiraos.

During his press conference, Jerome Powell was asked about the abrupt turn, especially in the context of his own seeming repudiation of hike increments larger than 50bps during remarks following May’s policy decision. “I’d like to think our guidance is still credible,” he said, calling it “an unusual situation to get data during our blackout that changes the decision.” He was referring, of course, to May’s CPI report, which tipped the scales in favor of an outsized rate increase.

Even as critics generally applauded the Fed’s mea culpa, some worried the haphazard character of policymaking risks further eroding the Committee’s credibility. “Its signaling of two 50bps increases a few weeks ago first led markets to contemplate a September pause in the rate cycle [but] that thinking was then firmly displaced by speculation about an immediate 75bps increase on a journey to a terminal rate well above anything mentioned by the Fed,” Mohamed El-Erian said. “That caused yet more undue volatility.”

As it turns out, George agrees. Or at least sympathizes with the sentiment. On Friday, she explained her dissent.

“I viewed [the] move as adding to policy uncertainty simultaneous with the start of balance sheet runoff,” George wrote, in a statement. “With high inflation and a tight economy, the case for continuing to remove policy accommodation is clear-cut,” she went on to say, before making it plain that no one should (mis)construe her position as advocacy for a more dovish approach.

“Inflation began building over the past year and has shown no meaningful signs of deceleration,” George said, noting that she’s argued for the end of asset purchases, the onset of balance sheet rundown and rate hikes “for some time.”

That said, she expressed concern about both the optics of a 75bps move and officials’ inability to predict how such large increments might impact the economy down what promises to be an arduous road ahead.

“The speed with which we adjust the policy rate is important. Policy changes affect the economy with a lag, and significant and abrupt changes can be unsettling to households and small businesses as they make necessary adjustments,” George cautioned, adding that “it also has implications for the yield curve and traditional bank lending models, such as those prevalent among community banks.”

Note that rates were extraordinary unhinged this week. The front-end experienced dramatic swings (figure above) as markets struggled to determine whether the Friday-Monday repricing, catalyzed by the CPI report and the Timiraos article, respectively, was too much, not enough or just right.

Having expressed her reservations, George closed by reiterating the obvious. She “share[s] the Committee’s strong commitment to bring down inflation.”