MNI: Bostic Anticipates More Fed Hikes Will Be Needed

Atlanta Fed President Raphael Bostic said Tuesday the central bank will need to continue to hike the fed funds rate as it appears tighter money has not yet constrained business activity enough to seriously dent inflation.

In an essay titled “On Long and Variable Lags in Monetary Policy,” Bostic says a large body of research suggests it can take 18 months to two years or more for tighter monetary policy to materially affect inflation but pointed out another school of thought indicates the lags may be shorter.

"Still, monetary policy unquestionably works with a lag," he said. "So, we at the FOMC calibrate policy today knowing we won’t see its full impact on inflation for months. In those circumstances, we must look to economic signals other than inflation as guideposts along our path."

GLIMMERS OF HOPE

While pointing to a 25% fall in private residential fixed investment and clues that tighter financial conditions may be pinching other sectors such as commercial real estate development and banking, the Atlanta Fed president says activity has not slowed down enough.

"By and large, though, it appears tighter money has not yet constrained business activity enough to seriously dent inflation," he said, adding that there have been "glimmers of hope" on inflation.

The BLS reported Tuesday the headline producer price index rose 0.2% in October, below expectations, while September's increase was revised down 0.1ppts to 0.2%. Core PPI, at a 0.0% change month-over-month in October, was at the lowest level since November 2020.

Asking when monetary policy might be close to sufficiently restrictive, Bostic said: "I will need to see indicators of broad-based easing of inflation." Richmond Fed President Thomas Barkin told MNI in an interview last week the Fed’s ultimate peak in rates might need to be higher due to stubbornly high inflation.