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The U.S. central bank needs to keep raising interest rates until there are signs of broad-based easing of inflation, said Atlanta Federal Reserve President Raphael Bostic, on Tuesday.
The Fed’s job is to bring supply and demand into better balance and this will happen with the central bank’s benchmark interest rate is high enough to return inflation to the central bank’s 2% target, Bostic said, in an essay posted on his regional bank’s website.
“We are not there now, and so I anticipate that more rate hikes will be needed,” Bostic said.
How will he know when the Fed’s benchmark rate is close to being sufficiently restrictive?
“I will need to see indicators of broad-based easing of inflation,” Bostic said.
Already, there are “glimmers of hope” on inflation, Bostic said, noting goods prices have slowed in the last three months, according to the Fed’s favorite personal consumption expenditure price index.
“We will need to see increases in services prices slow too. So far, we haven’t,” Bostic said.
It will take some cooling of the labor market to easing pressure on services prices, he said.
Earlier this month, the Fed approved a fourth-straight jumbo 0.75 percentage point rate increase, bringing its benchmark rate to a range of 3.75%-4%. That rate was close to zero in March.
Bostic said this tighter policy has not yet constrained business activity enough “to seriously dent inflation.”
But Fed interest-rate policy acts with a “lag” between the hikes and their impact on the economy. So, the full impact on inflation from this rapid pace of hikes won’t be seen for months, Bostic said.
So the Fed will need to calibrate future policy moves with this lag in mind.
To do this, “we look to economic signals other that inflation as guideposts along our path,” Bostic said.
Fed officials have signaled they may step down the pace of the rate hikes to a half percentage point hike at their next meeting in mid-December.
Officials have said the ultimate level of the policy rate is more important than the pace of hikes.
There are risks that the the Fed might induce a recession, Bostic noted.
“While there are risks that our policy actions to tame inflation could induce a recession, that would be preferred to the alternative,” Bostic said.
Allowing inflation to remain entrenched will result “in more prolonged and deeper economic pain,” he said.
“There are many scenarios in which a recession, if it does occur, could turn out to be mild by historical standards,” the Atlanta Fed president said.
Stocks
DJIA,
SPX,
were higher on Tuesday after softer-than-expected wholesale inflation data was released, spurring hope the Fed might not have to raise its benchmark rate above 5%. The yield on the 10-year Treasury note
TMUBMUSD10Y,
fell to 3.8%.
