MNI INTERVIEW: Fed's Bostic Wants Rates On Hold Until End 2024

Federal Reserve Bank of Atlanta President Raphael Bostic told MNI Wednesday he's prepared to hold interest rates at current 15-year highs through the end of 2024, but would be willing to support additional monetary tightening if inflation proves more stubborn than he expects.

"I have our fed funds rate at the level it is right now to the end of the year and then staying at that level for all 2024 as well," he said about his contribution to the June Summary of Economic Projections released last week.

"I'm trying to stay away from the 'pause' language. I do think that we need to just see how the world moves and I think 'pause' implies that we have a preconceived notion of what we're going to do next or down the road and I really don't. I'm very open on what's happening" at future meetings, he said in a phone interview.

Bostic said his forecast sees unemployment rising slightly to 4.0% by yearend and 4.3% by the end of 2024. Headline PCE inflation will "steadily come down" to 3.5% this year and 2.7% next year, with core PCE moving down to 3.8% this year and 2.7% next year, he said.

TRIGGERS

The Atlanta Fed chief said he will be looking at two "metrics of urgency" that could help trigger needed future fed funds rate movements, including a baseline trajectory of inflation toward 2% and long-run inflation expectations.

"We don't see alarm bells in either of those metrics," he added. "As a result, I'm not feeling there's a lot of urgency to move right now. If that changes in the next month or two months, I'm going to change my position and we say the word data dependence, and we let information inform us."

Bostic said he's expecting a continued steady decline in inflation, but it will not be precipitous. "That just means that this will just take a lot longer to fully resolve than I think some people are hoping for in their their projections."

Last week the Federal Reserve paused its aggressive series of interest rate hikes, ending a string of 10 consecutive increases that stretched back 15 months. However, the FOMC signaled potentially raising rates to 5.6% at a slower speed from its current range of 5% to 5.25%

Fed Chair Jerome Powell told lawmakers on Capitol Hill earlier today that skipping a rate rise last week was “prudent” given “how far and how fast” the Fed has lifted its benchmark rate since March 2022.

Other central banks in recent months including the Reserve Bank of Australia and the Bank of Canada paused but due to sticky prices subsequently restarted rate hikes. "The lesson for me to draw is that I've got to be open to all possibilities. And our economy could evolve in ways that leave us in a place where raising rates again might be the right action," he said when asked about the lessons from those central banks.

PASSIVE TIGHTENING

Bostic foresees a "passive tightening" of policy even if the Fed stands pat because the real interest rate will increase as inflation continues to fall in coming months. Moreover, Bostic is a firm believer in policy lags, and thinks the economy still has yet to feel the full brunt of the Fed's rapid recent rate rises.

When the impact does hit the slowdown is going to be more dramatic and faster than it is right now, Bostic said. "That's a reason why I do feel comfortable showing some patience that I do think there's a fair amount of our policy impact that is yet to present itself," he said.

Additionally, credit is also likely to continue to tighten in part a result of March’s bank failures, he said. "I do think we're going to see more tightening in the months to come. Because we do have looming credit risk coming. We know that there are credit problems and valuations for commercial real estate, particularly in offices."

Asked about some observers' worry that inflation has settled into a range that is too high, with core PCE inflation around 4.7% since December, Bostic said the totality of the inflation information needs to be reconsidered and pointed to his bank's Underlying Inflation Dashboard.

"The narrative is a bit more positive than perhaps some of my colleagues are feeling," he said, adding that the Cleveland Fed's 16% trimmed-mean CPI is "very close to 2% to 2.5%" and "that's basically at target today."

RESILIENT ECONOMY

Bostic said the economy continues to perform in a way that is quite resilient but added that in the last month or two he has started to see signs of a slowdown including in the labor market.

More broadly, his business contacts have been "basically unanimous" in saying it's easier to hire today than it was a year ago, and he said surveys indicate there's further room for wages to ease.

"We're not at the same level of tightness that we were eight months ago," he said. "More and more of our contacts are telling us that they they're starting to feel like it's back to pre-pandemic time, with turnover rates are down very much. We're starting to hear more and more companies talk about being open to layoffs, especially for back office workers."

Still, Bostic believes a soft landing for employment is "definitely a possible outcome" as supply and demand come into better balance.