Inflation-fighting Fed isn't focused on impact of rates on stocks, Esther George Says

Kansas City Federal Reserve President Esther George said Thursday that higher interest rates are needed now to bring down inflation and that policymakers are not focused on the impact that is having on the stock market.

In a CNBC interview, the central bank official noted that the Fed is looking to tighten financial conditions, of which equity markets are a component, in an effort to tamp down price increases running at their fastest pace in more than 40 years.

“I think what we’re looking for is the transmission of our policy through market’s understanding, and that tightening should be expected,” George told CNBC’s Steve Liesman during a “Squawk Box” interview. “So it’s not aimed at the equity markets in particular, but I think it is one of the avenues through which tighter financial conditions will emerge.”

The S&P 500 is teetering on the brink of a bear market, or a 20% plunge from its high. Investors have grown nervous over both rising prices and the impact that a big jump in interest rates could have on corporate earnings and consumer behavior.

Earlier this month, the Fed approved a 50 basis point rate hike and has indicated similar-sized increases are likely at its next few meetings. A basis point is equal to 0.01%.

George said “we need higher interest rates,” but added that she’s comfortable with the pace the Fed is moving at now and doesn’t see the need for bigger jumps, such as a 75 basis point increase that some have suggested.

“Moving deliberately, making sure we stay on course to get some of those rate increases into the economy and then watch how that’s unfolding is going to be really the focus of my attention,” she said. “I think we’re good at 50 basis points right now, and I’d have to see something very different to say we need to go further than that.”

Despite her concern on inflation, George said other parts of the economy are performing well. However, she said she has heard form business contacts and others in her region that consumers are beginning to change behavior due to higher prices.

She also said she’s confident the Fed, which targets 2% inflation, can bring prices down through rate hikes and reducing the $9 trillion in asset holdings on its balance sheet.

“I think we’ll succeed in bringing down inflation, because we have the tools to do the heavy lifting on that as it relates to demand, and we do see financial conditions beginning to tighten,” she said. “So I think that’s something we’ll have to watch carefully. It’s hard to know how much will be needed to make that happen given all the moving parts that we see in today’s economy.”

The rate-setting Federal Open Market Committee next meets June 14-15. Markets are pricing in a near-100% chance the FOMC will increase its benchmark borrowing rate by 50 basis points, though there is a slight chance priced in for a bigger move, according to CME Group data. The rate is currently targeted at 0.75%-1%.