EXCLUSIVE: Fed’s Bostic says idea of ​​September pause not related to any looming market bailout

Atlanta Fed President Rafael Bostic said in an exclusive interview with MarketWatch that his suggestion that the central bank’s efforts to “pause” rate hikes in September should not be interpreted as a “Fed put” or a belief that the central bank will come to the rescue. .

In an interview on Tuesday, Bostic said the concept of any form of “Fed put option” was not a factor in his thinking.

“I think it’s a good story for a storybook in a way, but it doesn’t drive my thinking about policy,” he said.

Financial market conditions have tightened sharply this year as the Federal Reserve began raising its benchmark interest rate in the face of the highest inflation data in 40 years. Dow Jones Industrial Average DJIA,
-0.67%
Down 9% this year, while the S&P 500 SPX,
-0.63%
It is down 13% year-to-date. The yield on the 10-year Treasury bond TMUBMUSD10Y,
2.853%
has fallen below 3%.

Most Fed officials support a 0.5 percentage point rate hike at the Fed’s next two central bank policy meetings in June and July.

last week, Bostic proposes suspension in September Might make sense, leading to some upside in the market.

Bostic said a pause could be a good idea because the market’s reaction to the Fed’s shift to raising rates was “much stronger than we’ve seen historically.”

That raises the possibility that the broader economy will also respond quickly to a Fed rate hike, he said.

“I want to make sure I really understand the pace of change in relation to our policy response,” Bostic said.

By September, he said, some uncertainties in the economy could be resolved and imbalances in the labor market could ease, leading to a “significant drop in inflation.”

The flip side of the coin is that inflation is likely to continue higher as supply chains remain disrupted by overseas events such as the Ukraine war and the Chinese COVID lockdown.

The president of the Atlanta Fed said he would like to see the central bank raise its benchmark interest rate to a range of 2%-2.5% by the end of the year.

At that point, if inflation doesn’t fall sharply, Bostic said he would be “completely comfortable” pushing rates higher into growth-limiting territory.

“The goal is to lower inflation. We have to really address it in a conscious, persistent way,” he said. “I want to be open to both possibilities.”

The Fed’s policy rate will be in a range of 1.75%-2% following the expected hikes in June and July.

on Monday, Fed Governor Christopher Waller hits back On the idea of ​​suspending rates in September, he said he was in favor of raising rates by half a percentage point in the next “several meetings.”

St. Louis Fed President James Bullard has said he wants the Fed to raise interest rates to 3.5% by the end of the year.

For his part, Fed Chairman Jerome Powell said he wants to raise interest rates until “there is clear and convincing evidence that inflation pressures are abating and inflation is falling.”

Investors in the financial futures market believe the Fed will raise interest rates to 3% by the end of the year and then stop.

Bostic said he expects inflation, as measured by the personal consumption expenditures index, to slow to above 4% from 6.3% in April.

Fed staff expect PCE inflation to slow to 4.3% by the end of the year, minutes from the Fed’s last meeting showed.

Bostic said some of his contacts are reporting “preliminary signs” of slowing demand, which could affect the final level of the Fed’s benchmark interest rate needed to control inflation.

Bostic said that while there has not yet been a contraction, “certain groups have a lower willingness to spend freely.”

For now, the pullback in spending is concentrated in households with less wealth and savings because of the pandemic, he said. While there is generally a lot of savings in the economy, the distribution is distributed in such a way that wealthier households hold more savings and can afford higher inflation.

“As we go further, the number of households in this situation is going to decrease, which is why you’re going to see some layoffs,” he said.

“The economy is going strong,” Bostic said.

“The economy is likely to slow for a long time before it slips into a deeper recession,” he said. “I understand the concern. I don’t think we’re quite there yet.”

Bostic is not a voting member of the Fed’s rate committee this year. The Fed’s policy committee will meet on June 14-15.

Fed officials will stop discussing policy after this Friday (June 3) in preparation for the meeting.