Since the beginning of her tenure as president and CEO of the Federal Reserve Bank of Kansas City in 2011, Esther George has proven herself “hawkish” as a monetary policymaker. In 2019, George voted against all three Fed Funds rate reductions, saying last September that sluggish economic expansion — about 2 percent — wasn’t concerning enough to warrant accommodation given historically low unemployment and stable inflation.
Her stance in 2019 was consistent with that in 2016 and 2013, the other years the KC Fed was a voting member of the FOMC. Her hawkishness also echoes the policy stance of her predecessor and mentor, Thomas Hoenig.
When Hoenig reached mandatory retirement in 2011, George was the KC Fed’s first vice president and chief operating officer. Not an economist by trade, George has been with the Fed since 1982, starting as a bank regulator. The Missouri native grew up on a farm and said she “understands business cycles based on how they worked on the farm,” and applies this understanding to how she thinks about “the real economy.”
Paul DeBruce, CEO of a Kansas City-based agribusiness, was chair of the KC Fed’s board at the time George was named its ninth president; he called George a “strong voice for Main Street.”
At each FOMC meeting, George said she shares with her colleagues the regional view: “You would find me talking about agriculture, energy and all the things that are really part and parcel to this part of the country.”
She views the daily conversations she has with bankers and business people operating in the Tenth District as core to gaining the context that allows her to interpret the data the bank collects and get a read on the economy.
Since March, those conversations have occurred remotely, but they haven’t abated. Travel time recaptured is applied to listening. Additionally, George and her team have been adapting the annual Economic Policy Symposium, which the KC Fed has hosted each August in Wyoming’s Grand Teton National Park since 1982, to a virtual format.
Our conversation occurred just days before the U.S. government reported that second quarter annualized GDP had plunged 32.9 percent. What follows has been edited for length and clarity.
Q: You’ve been an advocate of less-aggressive rate cutting than occurred in 2019. Now rates are at zero and Chair Powell has said “we’re not even thinking about thinking about raising rates” until 2022. Individuals who rely on interest income, seniors and bankers in particular, are going to have a tough couple of years. What are your thoughts?
Esther George: It is very challenging for people who rely on interest income and for the banking system that relies on a margin to be able to lend. I have supported the Fed’s actions to this point — because we have an economy that was in a free fall — and for the central bank to provide whatever stimulus it can to lower the cost of borrowing is appropriate.
The Fed’s policy is intended to be a short term fix — a stimulus. When the economy begins to get its legs under it, the central bank has to begin to pull back on that accommodation to make sure you don’t distort pricing in the economy, that you don’t get in the way of the private sector doing what it needs to do.
In the past, that’s oftentimes been where the committee can have debates about what’s the right path. Right now [the Fed is] putting a lot of money in the economy to get demand going. Once we see that in a sustainable way, we will again have to face the choices of when it is appropriate to pull back because we’re not looking to disadvantage any part of the economy.
We don’t have strategic, targeted tools to use. We have very broad-based tools. So if they help one, they hurt another. We want to get back to the point where we have a neutral effect on the economy. So that debate lies ahead.
Q: You’ve said the beauty of the district banks is their proximity to the communities they serve, that you are able to listen to your communities. What are community bankers telling you?
E.G.: Very early on, we were hearing from our community bankers that they were already reaching out to their customers. They were making their own assessments of what the needs were going to be; many of them were immediately moving to deferral of loan payments and were really trying to understand what they could do.
That’s what community bankers are so well known for: Their business model is that line of sight to their community. They could pretty early on tell us as businesses closed, where they thought the needs were going to be. And a lot of that feedback ultimately has shaped the credit facilities that the Federal Reserve has activated.
Our community banks were among the first to take up the PPP. They have been very active in that space to get money out in their community. And I think as we look forward to the other credit facilities, bankers have been very core to helping us understand what they see in their communities and how they think these facilities can help fill some of the gaps in access to credit. So those sources of insight are really key.
The regional structure of the Federal Reserve allows us to have long term relationships across our region that really pay off in a time of crisis when you need information quickly and reliably. And that’s proven to be the case this time.
Q: How is the energy sector doing?
E.G.: Well, without demand for oil and gas for travel and some of the industrial uses, that has hit hard in our region, particularly in states like Oklahoma and Wyoming. We saw a lot of investment come out of the energy sector going back over the last five to seven years. So they’ve been hard hit and we see layoffs happening there. We see rigs being laid down. So it’s a hard time for states that relied heavily on [energy]. Oil prices have come back up, but they have to come up to a point where it’s profitable to begin to drill again and we’re not there yet.
Q: You joined the Fed in 1982 as a bank examiner, and were in that role for 10 years, which coincided with the ag crisis. Ag producers have had some really difficult years lately and I know community bankers are already having tough conversations with some producers. Many have started restructuring ag debt. How do you compare the issues during the ’80s with today?
E.G.: Today’s issue is not high interest rates or high leverage. In fact, today we see relatively low levels of debt and steady land values, despite the fact that for a good six years now, we’ve seen very low farm income — and that income has been supported substantially by government subsidies. This is a stressful time in the ag sector and I think some of the lessons from the ’80s we still see our banking community applying today — a focus on cash flow and responding to issues early and not relying on collateral values to be the answer. And that means some producers will struggle more and bankers will have to be addressing those issues with their borrowers.
As we look ahead, it’s hard to tell what changes the course. When you see oil prices drop, the demand for corn related to ethanol production is going to be affected. And we see that in continuing low commodity prices. Whether the subsidies will continue is always a question, and that will cause further stress in that industry.
Q: You wrote recently about payments, the unbanked, and Central Bank Digital Currency, a digital version of cash. I understand the Fed has done extensive research on CBDC. Might we expect a feature like this to emerge once the FedNow Service is operational?
E.G.: You can’t pick up a newspaper today without seeing something about a cryptocurrency, a digital currency of some kind and not respond. Technology on many fronts is posing great opportunities and great challenges to the banking system and to the Federal Reserve. This issue of digital currencies has really taken hold even in the central bank community with countries that are going as far as to create prototypes.
If you go look at the central bank of Sweden, a small economy where they’ve seen less and less use of cash … they’re probably the farthest along in terms of thinking about this. The Federal Reserve has been watching this very carefully.
When I say we’ve been looking at it, I would not want to lead you to think we’re prepared to adopt one or advocate that the United States needs one. We have this two tier system: The central bank provides payment services or infrastructure, but we really rely on the banking system to carry it out in the way their communities and their customers need.
There are no plans for the Fed to roll out a digital currency. In fact, there are a lot of questions about how that would interrupt this framework we have today and how you would provide the consumer protections.
We’re building a new rail that will provide for real-time settlement of payments in the United States, and will rely on the banking system and other parties to innovate on top of that.
Q: You’re talking about FedNow. Is that still a couple of years away?
E.G.: We set our sights on a 2023-2024 implementation. We’ve spent much of the last few years really trying to understand the marketplace and work with the banking system to see whether there were going to be other options out there. It’s a pretty short timeframe, as you know, even though I know people want it today. We are on track and are still focused on that. I think the team here would be delighted if they could beat that with a solid product offering, but those dates, that’s still the plan.
Q: Talk about the Main Street Lending Program. In all of the Tenth District, only 23 banks had signed up to participate (at press time) and one of them is Bank of America. What do you think is holding banks back from embracing this program?
E.G.: Remember the Main Street Lending facility is relatively new. It’s gone through several iterations of making sure, with good feedback from the banking community, of understanding where it’s positioned relative to the lending they do. And I’ll give you an example.
Main Street is designed to have the credit risk come back to the Fed, and the banks hold just 5 percent of that exposure. They also get a fee for originating. But if you think about the borrower that this program was designed for, it tends to be a riskier borrower. It has certain limitations on how much leverage and other constraints around that. So the bankers who by and large know how to size up credit risk know that they’ll be dealing with a particular kind of customer.
This is, by design, not focused on their current set of customers. This has to go to new borrowers. The fact is, it just rolled out in earnest for applications. It is a loan that has to be repaid, even though it has pretty flexible terms for that five year period. It’s not a grant as the PPP loans are. So I think by its very nature, it is going to be a tool that will be very helpful when it’s needed. And it’s either maybe too soon or it’s not certainly going to apply in every case. I think our bankers are really making that judgment right now [asking] where can I continue to lend to my own customers? And when do I think this kind of a facility could help a different kind of customer that may need that financing?
I think it’s too soon to say that, because we’ve had a subset of the banking industry register, the take-up has been slow or that we might not see more activity there between now and the end of the year and beyond.
Q: With states shutting down again and infections on the rise, if I’m a business owner, a loan, even a loan with favorable terms, can’t be that appealing when you don’t even know if you’re going to survive. Did you factor these potentialities in as you’ve developed this or other lending facilities?
E.G.: The outlook for the economy will ultimately determine whether businesses can be viable in the long term, whether they will be able to resume their business activities. Obviously applying more debt may not be the answer in every case. In fact, we know many small businesses rely so heavily on revenues that are needed to pay workers and their other capital investments that they are reluctant to say debt is the answer. It’s why other policies are important too. Congress has to look at where the pain is.
But the truth is within the Federal Reserve’s authorities, the kinds of actions we’re taking are relegated to monetary policy. In other words, making sure that there is enough accommodation in the economy to make financing conditions easy. And we have emergency lending authorities that have to be approved by the U.S. Treasury, post Dodd-Frank, post Great Financial Crisis of 2008-09. Within those parameters, the Federal Reserve is activating.
You see markets have stabilized. And that’s very important in determining the rate at which businesses can get access to credit. But I would agree with you, it is not the answer in every case, particularly for some of our smallest businesses, to lever up. If you knew exactly when the economy would reopen, when exactly they could expect to return to the revenues they enjoyed pre-Covid, that would be another thing. But there’s a lot of uncertainty there. And I understand why businesses are reluctant to make the judgment that having more debt is going to be the answer to the problems they face today.
Q: How do you stay optimistic in this environment?
E.G.: On any given day we all have plenty to worry about, but here’s what I think we have to remember. We went into this with a strong economy; we had the lowest unemployment rate we’ve seen in half a century; we had bank capital levels that looked very different over the past 10 years in terms of being positioned to have a financial system that could respond during a time of crisis.
If you could pick the timing of a shock hitting your economy, you wouldn’t want it to happen when you were in an early stage recovery. This came at a time when the fundamentals of our economy looked good. The things Congress is doing and that the Fed is doing are designed to bridge us to an economy that can get back on its feet again.
There are things individually we can do, and that businesses can do, to try to make a safe workplace. I think we also have to remember this is a pretty new event for us. We keep learning more and I think we have to have some confidence that businesses will know how to respond and that those who are able to provide financing and accommodation are doing everything they can to get us to the other side of this.
I think you find American business is by and large a resilient lot. This is a business environment where people are looking for ways to continue to not only make money for themselves, but to serve their communities. Given the right resources, we can move ahead through this.
We all know the big question marks are the public’s confidence and business confidence. That will come from knowing we can manage the virus.