The Federal Reserve building, in Washington, on June 14, 2022.Sarah Silbiger/Reuters
The U.S. central bank likely remains on track to cut interest rates this year even if the timing and extent of the policy easing is uncertain and further declines in inflation come only slowly, Atlanta Federal Reserve President Raphael Bostic said in an interview with Reuters.
“I still have that belief” that interest rates can be lowered this year despite a first quarter in which the pace of price increases seemed to stall well above the Fed’s 2 per cent target, Bostic said in his first public comments since the central bank’s policy meeting last week.
Conversations with businesses in his U.S. Southeast Fed district indicate that wage and job growth will likely slow, Bostic said, and that most firms feel their pricing power is in decline after the fast price hikes that pushed inflation to 40-year highs in 2022.
“There is an expectation for most of the employers I talk to that they will get back to pre-pandemic wage growth,” Bostic said in the interview on Thursday. And with the possible exception of tech companies, “we’re hearing from pretty much everyone … their pricing power is pretty much at its limit.”
That should set the stage for further progress on inflation through the year, Bostic said, and for the Fed to eventually begin easing monetary policy.
But it may take a while. Bostic noted, for example, that even though U.S. job growth in April was weaker than expected, the gain of 175,000 positions was still a strong number that needs to ebb further for him to feel it is consistent with the Fed’s inflation target.
“I don’t think we’re going to know that for at least a couple of months,” he said. “I’m hopeful that we do continue to see this slowing down because my outlook really says that you’re going to have to see some slowing down in order to get inflation back to our 2 per cent target … We still are seeing robust job growth.”
A voting member of the central bank’s policy-setting Federal Open Market Committee this year, Bostic supported the decision last week to hold the benchmark interest rate steady again in the 5.25 per cent-5.50 per cent range that was set in July.
Bostic said he still sees only a single quarter-percentage-point cut likely coming late this year, and that his focus now is less on how much the policy rate might fall through 2024 and more on determining the right timing for any move lower.
“We’re just going to have to be patient and wait until inflation gives us signals that it is more robustly heading towards 2 per cent,” he said. “It is going to take some time. For me the question, as opposed to how many this year, is when that first one will happen.”
Fed officials and investors have steadily pushed that moment back this year from rate cuts that were seen beginning as soon as March but are now not expected to start until September. Fed officials will update their economic and interest rate outlooks at their June 11-12 meeting.
The Atlanta Fed chief said at this point he sees inflation returning to 2 per cent in late 2025 or early 2026, a slow grind back to the Fed’s defined level of price stability that he feels will allow the central bank to avoid a sharp rise in unemployment. The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose at a 2.7 per cent annual rate in March.
Though job growth needs to slow, Bostic said he still estimates that monthly employment gains in the “low” hundred thousand range – far below what has been common during the pandemic – would be consistent with a steady unemployment rate for the U.S.
The unemployment rate edged higher to 3.9 per cent in April, continuing a two-year run of sub-4 per cent joblessness not seen since the 1960s. Even the recent weak 1.6 per cent growth in gross domestic product in the first quarter has been dismissed by most Fed officials as not reflective of the economy’s underlying strength.
The issue now is how much further that needs to cool for inflation to fall and how fast that will happen.
Bostic said he was an “optimist” in believing that price pressures will ease, even if the policy rate of interest “was going to need to stay higher for longer and the ride was going to be bumpy.”
“When I talk to business leaders, they all tell me they see things slowing down … We see the same thing in our surveys for that matter,” Bostic said. “But it’s pretty clear that the U.S. economy is quite strong. It is continuing to produce a lot of product and a lot of jobs … We have got to be committed to get inflation to 2 per cent. And at the end of the day, we’re going to have to do whatever it takes to get there.”