(RPT)MNI: Bostic Wants Fed Pause, Sees Risks From Yield Surge

(First published Oct 3) The Federal Reserve should stop raising interest rates and figure out how long it needs to keep policy tight in order to bring inflation back to target, Atlanta Fed President Raphael Bostic said Tuesday, flagging a possible hit to economic activity from the recent spike in long-term bond yields to 16-year highs.

"Our policy is sufficiently restrictive at this point to get us to the 2% target," he said in a virtual briefing with reporters.

"My next decision is not really on when to cut, but really how to assess how rapidly the economy is likely to move to 2% which is really much more about monitoring the degree and the scope of economic slowdown and also monitoring what's happening on the supply side."

Bostic said the rise in the 10-year and 30-year Treasury yields to their highest levels since 2007 could become a contributing factor to the slow down in the U.S. economy, but he will have to see it in the data and consumer behavior before altering his outlook for monetary policy.

"One of the things we're going to look at ... is the pace at which the economy slows down, and these yields I think are going to be a contributing factor to that. Ultimately, it's what happens in actual behavior."

Bostic pointed to mortgage rates and home prices as an example. "In some places, home buying has accelerated even with the high prices, and so we need to make sure that we're that we stay focused on the actual measures for us which are maximum employment and stable prices."

"I'll just have to monitor to see how the broader economy responds to these tighter conditions. If it looks like that's accelerating in terms of a degree of slowdown, then sure, I should look to modify my expected policy trajectory," Bostic said. "Today, right now, that's not what I'm seeing."

ONE CUT IN 2024

Bostic said last week in the Fed's Summary of Economic Projections he penciled in no more rate rises this year and one cut "toward the end" of next year. "It is appropriate for us to hold for a long time." Bostic also shared that he did not raise his view of the longer-run fed funds rate.

(See: MNI INTERVIEW: Fed Likely Overtightened-Ex-Boston Fed's Fuhrer)

There is an ongoing debate at the Atlanta Fed over whether elevated GDP will not be inflationary—and could even be associated with disinflation—if worker productivity rises, he said. "What we'll be trying to do over the next several weeks is really trying to unpack this productivity story."

"'I'm hopeful that productivity is the answer, because if it is the answer then we can see very strong growth while inflation comes down. That's the best of all possible worlds," he said. "If its not then then I think the other narrative about having to see growth go below trend is probably what we're gonna have to get. The jury is still out."

The Atlanta Fed president also released an essay Tuesday arguing risks are more balanced and there has been great progress on inflation while avoiding the widespread unemployment and slower economic growth that many predicted. "That has put a soft landing within reach, and I will be working hard to try to achieve it," he said.