Fed’s Bostic prefers a slower pace of rate hikes that end close to 5%

Atlanta Federal Reserve Bank President Rafael Bostick has said he favors slowing the pace of interest rate increases, with increases no more than 1 percentage point, in an effort to ensure a soft landing for the economy.

“If the economy continues as I expect it to, I think 75 to 100 basis points of additional tightening would be warranted,” Bostick said in prepared remarks for the speech in Fort Lauderdale, Fla., on Saturday. “Clearly more is needed, and I think this level of policy rate will be sufficient to rein in inflation over a reasonable period of time.”

Bostic’s plan would shift away from 75 basis points and continue to raise interest rates to 4.75%-5% over the next several meetings, which he described as a “fairly restrained landing rate” where the Fed would remain on hold. for an extended period to continue downward pressure on prices.

Federal Reserve officials raised interest rates by 75 basis points for the fourth consecutive time on November 2, putting the target on the benchmark rate between 3.75% and 4%. Several policymakers have indicated that they may consider a 50 basis point increase when they meet in mid-December, depending on what happens with the economy.

“In terms of velocity, assuming the economy develops as I anticipate in the coming weeks, I would be comfortable starting to move away from 75 basis point increases at the next meeting,” Bostick said at the Southern Economic Association’s annual meeting.

Bostick’s view around the 4.75% to 5% peak rate is less aggressive than some of his more hawkish colleagues. St. Louis Federal Reserve Chairman James Bullard on Thursday called for rates to be at least 5% to 5.25%, showing charts that set 5% to 7% as the recommended policy rate using versions of common monetary policy guidelines.

While Bostick reiterated that there is a “glimmer of hope” that supply disruptions are abating, he said inflation is a “mixed bag” and more work is still needed to combat price pressures.

“My basic view is that the macro economy will be strong enough that we can tighten policy to that point without causing undue disruption to production and employment,” Bostick said.

I don’t think we should keep raising interest rates until inflation is down to 2%. Because of the lag dynamics I discussed earlier, this will ensure deep overruns and slumps.

Bostick said that once policy reaches a sufficiently restrictive level, he envisions a long pause in prices rather than a quick reversal, to ensure that inflation does not rebound in a manner similar to the 1970s experience. He called on policymakers to “remain purposeful and resolute” until inflation is brought down.

“If it turns out that this policy is not restrictive enough to rein in inflation, then additional policy tightening may be appropriate,” Bostick said. “On the other hand, if economic conditions weaken significantly — for example, if unemployment rises uncomfortably — it will be important to resist the temptation to react by reversing our policy course until it becomes clear that inflation is on track to return to a longer-term operating target of 1 percent. 2%.”

© Bloomberg 2022

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