MNI: Fed's Bostic Sees Higher 'Landing' Rate, Smaller Dec Hike

The Federal Reserve might raise interest rates more than anticipated to combat high inflation but officials can slow the pace of tightening next month, Atlanta Fed President Raphael Bostic said in a speech on Saturday.

“Inflation has been more persistent than most have forecast, and so we might find that a higher ‘landing rate’ is necessary,” Bostic said. Another 75 to 100 basis points of tightening may be needed before the Fed can pause, he said, adding policymakers are nowhere near reversing course.

Fed policymakers penciled in a median 4.6% peak fed funds rate in their September projections, a figure likely to be revised higher in December, with fed funds futures expectations hovering near 5%. (See MNI INTERVIEW: Fed's Barkin-Prices May Force Higher Rates Peak)

Rate-sensitive sectors like housing are feeling the pinch from the Fed’s aggressive policy tightening, Bostic said, with the fed funds rate pushed up 375 points since March to a 3.75% to 4% range.

“Beyond this, there have been few signs of softening demand or increases in supply that auger rapid inflation drops in coming months. This suggests there is more work for monetary policy to do,” said Bostic in prepared remarks to the Southern Economic Association. “We have yet to see underlying inflation move decisively downward in a way that looks sustainable.”

SLOWER PACE

Bostic also echoed a chorus of Fed commentary arguing it's time to slow hikes to 50 basis points after four consecutive 75bp increases. Fed officials are keen to consider how the lagged effects of monetary policy are filtering through the economy.

“Being more cautious as policy moves deeper into restrictive territory seems prudent,” Bostic said. “Assuming the economy evolves as I expect in the coming weeks, I would be comfortable starting the move away from 75-basis-point increases at the next meeting.”

That doesn’t mean the Fed will cut rates soon after it stops raising them, even if economic growth hits a wall, he said. “It will be important to resist the temptation to react by reversing our policy course until it is clear that inflation is well on track to return to our longer-run target of 2%,” Bostic said.

"While I do not speak for my colleagues on the FOMC, I think there is consensus that we do not want to stir even more questions into an already uncertain economy," by quickly reversing course, he said. "We want the public and markets to clearly understand our aims, and the fact that we are going to be unwavering."