Fed’s George Says Higher US Savings May Also Mean Higher Rates Needed

(Bloomberg) — Kansas City Federal Reserve Bank President Esther George said ample US savings will help to buffer households but could also mean higher interest rates are needed to cool spending.

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George told a panel Tuesday in Santiago hosted by the Central Bank of Chile that if savings are concentrated in wealthier households who tend to spend a smaller share of their wealth, it might not provide much of an additional boost to spending.

“However, if those savings are spread more evenly across the population, including households with a higher propensity to spend out of their wealth, then the effect on the persistence of consumption is likely to be larger,” she said, requiring higher rates, notwithstanding the wider benefits.

“While high savings is likely to provide momentum to consumption and require higher interest rates, it’s certainly positive that we see that these households are wealthier, less financially constrained and better insured,” she noted. “But that said, reduced inflation will mean we have to incent saving over consumption.”

The Fed lifted interest rates by 75 basis points for the fourth straight time this month, bringing the target on its benchmark rate to a range of 3.75% to 4%.

Investors expect the US central bank to downshift to a smaller, half-point, increase when it gathers for its Dec. 13-14 meeting and for the benchmark rate to peak at about 5% next year, according to pricing of contracts in futures markets.