Fed’s Bostic: No urgency to cut interest rates given US economy’s strength

© Reuters. FILE PHOTO: Atlanta Federal Reserve President Raphael Bostic speaks at the South African Reserve Bank’s Biennial Conference in the Cape Town International Convention Centre, South Africa, August 31, 2023. REUTERS/Esa Alexander/File Photo

By Howard Schneider

WASHINGTON (Reuters) – The U.S. Federal Reserve is under no urgent pressure to cut interest rates given a “prospering” economy and job market, Atlanta Fed President Raphael Bostic said in remarks that highlighted the risk inflation may get stuck above the central bank’s 2% target or be sent higher by “pent-up exuberance.”

“I need to see more progress to feel fully confident that inflation is on a sure path to averaging 2% over time,” Bostic said in a new essay on Monday citing the possibility that underlying inflation could get stuck above the central bank’s target, and that a flush of new demand in the economy could send inflation higher again.

“Only when I gain that confidence will I feel the time is right to begin lowering the federal funds rate,” said Bostic, a voter this year on interest rate policy. “The good news is the labor market and economy are prospering, furnishing the (Federal Open Market) Committee the luxury of making policy without the pressure of urgency.”

The Fed at its upcoming March 19-20 meeting is expected to maintain the benchmark interest rate in the 5.25% to 5.5% range, where it has been since July, and will also issue updated projections for how far rates may fall this year given recent declines in inflation.

Investors currently expect an initial rate cut in June, but that could slip if inflation stalls or the job market and wages continue to beat expectations.

As a baseline, Bostic said he felt inflation was in line to “slowly” return to the Fed’s target without major damage to the job market or growth, what he called a “resounding success.”

But that outcome, was “hardly assured…it is premature to claim victory in the fight against inflation,” he said.

In particular, Bostic said he was concerned that prices for a larger-than-usual share of items are still increasing at a more than 5% annual rate, while a Dallas Fed measure of underlying inflation, at 2.6%, has been stuck “just outside the neighborhood” of the central bank’s target.

Bostic said recent talks with business executives made him feel both confident the economy was strong, but concerned about a new surge of demand.

“Many executives tell us they are on pause, ready to deploy assets and ramp up hiring when the time is right,” Bostic said. “If that scenario were to unfold on a large scale, it holds the potential to unleash a burst of new demand…This threat of what I’ll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months.”