MNI Fed's Bostic: Tax Reform Could Move Needle on Economy

--But Too Early to Factor in Fiscal Changes

--See Rates Rising Gradually Over Next Couple Years

--Watching Inflation Reports Carefully for Pick-Up

By Jean Yung

     WASHINGTON (MNI) - The Republican proposal to cut taxes could spur growth

above its current trend rate of just above 2%, but it is still too early to

build potential changes into models for monetary policy, Federal Reserve Bank of

Atlanta President Raphael Bostic said Tuesday. 

     For now, gradual interest rate increases over the next couple of years

remains the best policy, he said in remarks prepared for an event hosted by

Auburn University in Montgomery, Ala. 

     "It is possible that tax reform, if it's enacted, could be one of the

needle-movers on economic activity. We've started conversations with our

contacts to see how changes to the structure of corporate taxes might change

their thinking about investment and business expansion," he said. 

     "But, as everyone knows, the devil is in the details, and it's too early to

know how we would incorporate the impact of fiscal policy changes into our

outlook until we see those details." 

     His baseline scenario includes "GDP growth continuing a bit above 2

percent, the unemployment rate in the low 4s, and modest increases in real wage

growth," Bostic said. 

     "I think it will be appropriate for interest rates to rise gradually over

the next couple of years, as our policy position is still very accommodating

rather than neutral. How gradual that pace will be depends on the strength of

the incoming macroeconomic data and what it implies for the economic outlook." 

     Bostic votes next year on the Federal Open Market Committee. 

     He continues to believe the weakness in inflation this year reflects

"idiosyncratic noise," Bostic said, but added he is keeping a close eye on the

next few inflation reports for signs of a pick-up amid the pressures that should

emerge with an economy near full employment. 

     That said, he added, regional businesses have told the Atlanta Fed they "do

not expect a surge in growth" or "an upshift in growth for cost pressures,

including labor costs." 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com