Exclusive-Fed can ‘hit the mark and hold’ with one more rate hike, Bostic says

By Howard Schneider

ATLANTA (Reuters) – One more quarter-percentage-point interest rate hike can allow the Federal Reserve to end its tightening cycle with some confidence inflation will steadily return to the U.S. central banks 2% target, Atlanta Fed President Raphael Bostic said.

Recent inflation data, including this week‘s reports of slowing consumer price increases and falling producer price inflation, “are consistent with us moving one more time,” Bostic told Reuters in an interview on Thursday. “We’ve got a lot of momentum suggesting that were on the path to 2%.”

For now, the Fed is expected to increase rates by a quarter of a percentage point at its May 2-3 meeting, taking its benchmark overnight interest rate to the 5.00%-5.25% range, a level not seen since just before the onset of recession in the fall of 2007.

As of March, when Fed officials most recently updated their projections, 10 policymakers were in agreement with Bostic that one more increase would likely be the last, with one ready to forego that and pause now, and seven others seeing a still higher rate as needed to bring inflation to heel.

In the current situation, Bostic said he felt the aggressive rate increases of the last year, which pushed the policy rate from the near-zero level, are only now starting to “bite” on the economy. Thats a good reason to pause after one more rate increase, he said, to study how the economy and inflation evolve, and try to limit the damage to growth and jobs.

“There‘s more to do. I think the next step is going to be to figure out how much more,” Bostic said, noting that inflation remained two to three times above the Fed’s target depending on the measure used.

But “I think the point of ‘hit the mark and hold’ is ‘hit the mark and hold,’ unless you see a trend that is unmistakable, that is going in a way that makes you uncomfortable,” he said, referring to Fed plans to reach a tight enough level of interest rates and leave them unchanged for a potentially extended period of time while inflation declines.

‘HAD TO DOWNSHIFT’

The Atlanta Fed chief spoke in detail about how the recent turmoil in banking markets buffeted his monetary policy views.

At first, high inflation made him open to a half-percentage-point increase at the March 21-22 Fed meeting. But going into the session, which ended with policymakers raising rates by 25 basis points, he was considering abandoning rate hikes altogether, a sentiment shared by several of his colleagues, according to recently released minutes of the session.

Between the failure of Silicon Valley Bank on March 10, the collapse of Signature Bank soon after, and the forced merger of Credit Suisse on the eve of the Fed meeting, “I kind of had to downshift a bit and say, ‘I gotta have a hold or pause on the table because we’re in the midst of this chaos,\'” Bostic said.

Yet like many of his colleagues, Bostic said he became convinced at the meeting, and more so since, that recent bank stress will not cause a dramatic blow to lending or a deeper-than-anticipated economic slowdown.

Indeed, Bostic sketched out why he still believes the inflation battle can be won without a recession or even much of a rise in the unemployment rate.

It‘s an outlook that is given increasingly narrow chances by investors who see Fed rate cuts ahead, by U.S. central bank staff who project a recession will be underway by the end of the year, and by Bostic’s colleagues who see the unemployment rate rising a full percentage point to 4.5% by the end of this year.

In contrast, Bostic said he thinks the unemployment wont need to rise above 4%, while the economy can continue growing, even if only slowly, at about a 1% annual rate.

The logic？

“Its the pandemic,” he said, attributing continued consumer demand, and the strong hiring that flows from it, as the result of distortions in the economy from the trillions of dollars of government support rolled out during the COVID-19 health crisis.

Those distortions should ease over time without, he feels, destroying the economys momentum altogether or requiring massive labor “slack” for inflation to fall.

People and businesses “are sitting in a financial condition that is abnormal, and abnormal in a way that would drive excess consumption,” Bostic said. “That abnormality has not worked itself through the economy.”

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)