MNI: Atlanta Fed's Bostic: May Not Want To Stop Before Neutral

By Sara Haire

     SAVANNAH, GA. (MNI) - With the economy running close to target and

inflation near the 2% goal, Atlanta Federal Reserve Bank President Raphael

Bostic said in a speech Monday that he is that he is comfortable continuing with

rate hikes as the federal funds rate continues its path towards neutral, but

noted that he is still in the camp that looks for only one more rate hike this

year, in contrast to a movement in the median forecast for two hikes last

Wednesday.

     "The economy is about as close to target as we've seen over this

expansion," Bostic said, noting the difficulty in reaching neutral policy to

keep the expansion "going in a sustainable manner."

     Despite Bostic recognizing that inflation is running "very near the FOMC's

2% goals" and expected to continue to do so in the next few years, he retained

that this is no time for complacency as the "job of a monetary policymaker is

becoming more difficult."

     The speed at which monetary policy reaches neutral will be informed by

incoming data, but if data should continue to unfold in a way that is similar to

Bostic's outlook, he will be "comfortable continuing to move policy toward a

more neutral stance." However, where the neutral rate stands is still an unknown

to policymakers. The Atlanta Fed's estimates of the neutral rate are between

2.25% and 3.00%, capturing the Fed's latest median projection for the longer-run

federal funds rate at 2.9% in their Summary of Economic Projections.

     Bostic explained the economy "doesn't need any stimulus" according to the

data and in reference to historical standards, so he doesn't "necessarily want

to stop before neutral." He said to reporters that "if we facilitate extra

momentum, it makes it harder for us to pull back," indicating it would be more

difficult to combat an economic downturn if there are fewer monetary policy

tools to use.

     --CONCERNED ABOUT POTENTIAL 'SNAPBACK'

     Bostic noted that the labor market has continued to tighten, with the rate

of unemployment falling past what the Fed considers the natural rate of

unemployment of 4.5%. Bostic explained that the Committee has shifted their

expectations in the last few years, so their estimates again are not "set in

stone."

     However, Bostic voiced his concern about raising rates too rapidly, causing

the labor market to experience a "snapback" that could prove to be "fully

counterproductive." In order to avoid this, slower rate increases is "the right

way to go," he said. Although, he emphasized that people should have "caution

with the idea that the Fed has that amount of nuanced ability" to affect the

market trajectories.

     While the labor market has been ramping up, inflation and wage growth has

not shown massive increases that would require a faster pace of hikes.

     Bostic explained that wage growth has essentially flattened over the last

year, and many firms are not combatting labor shortages with increases in wages,

but alternatives like training employees.

     --GROWTH OUTLOOK RISKS

     While he did say that the economy has been doing "pretty well" and expects

it to continue throughout the year, he remains cautious for his outlook.

     Bostic explained that while the year started with an "upside tilt" to his

risk profile for growth, his contacts have seen a reversal in optimism, instead

"replaced by concerns about trade policy and tariffs."

     The expectation for 2Q GDP is as high as 4.8% according to Atlanta GDPNow

forecasting tool, however, Bostic said that this growth is probably tied to

"transitory or idiosyncratic factors that do not signal a major shift in

momentum."

     He explained that while consumer spending has picked up a bit, it is likely

because of unusual weather patterns pushing consumers to spend more on utilities

and there has been no discernible change in spending trends.

     Additionally, Bostic noted he is not "inclined to read too much" into the

recent acceleration in business investment since, outside of energy and oil,

investment is still below 5% on a year/year basis, lower than most expansions.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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