Atlanta Fed President Raphael Bostic believes that a single quarter-percentage-point increase in interest rates may enable the Federal Reserve to conclude its tightening cycle while ensuring that inflation returns to the central bank's 2% target. Bostic's comments follow recent inflation data, which indicated a slowdown in consumer price increases and a decline in producer price inflation.
Bostic said in an interview with Reuters on Thursday, "We've got a lot of momentum suggesting that we're on the path to 2%." The Federal Reserve is expected to raise rates by a quarter of a percentage point during its May 2-3 meeting, which would bring the benchmark overnight interest rate to a range of 5.00%-5.25%, a level not seen since just before the 2007 recession.
In March, when Fed officials last updated their projections, ten policymakers agreed with Bostic that one more increase would likely be sufficient, with one considering a pause and seven others believing a higher rate is needed to control inflation. Bostic explained that the aggressive rate hikes over the past year, which raised the policy rate from near-zero, are only now starting to impact the economy.
Bostic suggested that pausing after one more rate increase would allow time to assess the economy and inflation's development and help limit damage to growth and employment. He stated, "There's more to do. I think the next step is going to be to figure out how much more," adding that inflation remains two to three times above the Fed's target, depending on the measure used.
However, Bostic emphasized that the "hit the mark and hold" strategy means maintaining interest rates at a tight enough level for an extended period, unless an unmistakable trend causes discomfort.
Discussing the recent turbulence in banking markets, Bostic initially considered a half-percentage-point increase at the March 21-22 Fed meeting. However, events such as the failure of Silicon Valley Bank on March 10, Signature Bank's collapse, and Credit Suisse's forced merger led him to reassess and consider pausing rate hikes.
Despite these concerns, Bostic and his colleagues believe that recent bank stress will not result in significant lending issues or a deeper economic slowdown. Bostic also expressed optimism that inflation can be controlled without causing a recession or a significant increase in unemployment.
Bostic attributed continued consumer demand and strong hiring to the economic distortions caused by the trillions of dollars in government support provided during the COVID-19 pandemic. He believes these distortions will gradually subside without entirely undermining the economy's momentum or necessitating massive labor "slack" for inflation to decrease.
"People and businesses are sitting in a financial condition that is abnormal, and abnormal in a way that would drive excess consumption," Bostic explained. "That abnormality has not worked itself through the economy."
