MNI: Fed's Bostic Wants More Certainty In Inflation Fight

Atlanta Federal Reserve President Raphael Bostic said Thursday he is still not thoroughly convinced inflation is on track to the central bank's 2% target and will need to see continuing evidence of ebbing prices pressures to build greater confidence.

"Though the upside surprise in the January CPI will probably translate, at least partially, into a higher PCE inflation report, these [disinflationary] trends will not likely be substantially reversed as a result of one month’s data," he said in prepared remarks. "But even if that is not the case, I require more confidence before declaring victory in this fight for price stability."

Bostic said goods inflation may rebound a bit in coming months, inflation pressures are still more broad-based than preferred with over a third of the PCE basket rising at rates at or above 5% as of December, and the Dallas Fed’s trimmed-mean PCE price statistic has been stuck at 2.6% annualized over the past six months.

"That suggests that underlying inflation is still loitering just outside the neighborhood of 2%," he said. (See: MNI INTERVIEW: Fed Could Cut As Early As June - Quarles)

But the Atlanta Fed chief added inflation risks are more balanced. "For example, absent some new shock to the economy, a reacceleration of inflation seems much less likely in the near and medium terms," Bostic told the Money Marketeers of New York University in a speech.

THIS TIME IS DIFFERENT

Atlanta Fed staff is hearing from contacts that businesses are not distressed and there is potential for a burst in new demand, Bostic said.

"To me, this carries the ring of expectant optimism -- perhaps even pent-up exuberance -- with the potential to unleash a burst of new demand that could reverse the progress we have observed toward rebalancing supply and demand across the economy," he said. "In my view, this constitutes a new upside risk to my outlook that bears scrutiny in coming months."

"Scanning the broad macroeconomic horizon, one can only conclude that this monetary policy cycle is different," he said, noting a surprisingly resilient U.S. economy. "I as a monetary policymaker must grapple with new realities and formulate policy positions at a time when our go-to templates are of limited utility."

Bostic pointed to econometric evidence that found monetary policy tightening in past episodes on average led to about a half percentage point dip in real GDP over 2 to 2.5 years. But instead growth has been robust and there is currently a "remarkably strong" labor market.