– Time of Great Uncertainty ‘No Time for Significant Shifts in Monetary Policy’
– Labor Market ‘Broadly Healthy’ But Deterioration Could Change Policy Prescription
By Steven K. Beckner
(MaceNews) – Atlanta Federal Reserve Bank President Raphael Bostic called Thursday for “patience” in considering reductions in interest rates.
Bostic, who has previously projected just a single 25 basis point rate cut in the federal funds rate this year, pointed to persisting policy and other uncertainties and said such a period is “no time for significant shifts in monetary policy.”
Rather, with inflation still a worry and unemployment still historically low, this is a time for the Fed to keep taking a “wait-and-see” approach to setting rates, he said in an address to the International Monetary Fund’s Distinguished Lecture Series in Frankfurt, Germany,
Bostic did indicate rate cuts would become more appropriate if tariff hikes or other factors were to weaken the economy and labor markets, depending on what happened to inflation and inflation expectations, but said that is not the case currently.
Speaking after the Labor Department published a surprisingly strong June employment report, Bostic described the labor market as “broadly healthy,” but cited “signs of softening” that will bear watching.
On the inflation side of the Fed’s dual mandate, he acknowledged that “inflation has fallen substantially,” but said higher tariffs mean the U.S. “will likely experience a longer period of elevated inflation readings.” And he stressed the Fed must be careful to avoid an “unanchoring” of inflation expectations.
The Atlanta Fed chief, not a voting member of the Fed’s policy-making Federal Open Market Committee this year, essentially lent support to embattled Fed Chair Jerome Powell’s wary stance on monetary policy easing.
Ignoring pressure from President Trump two days ago, Powell stood by his view that the FOMC can afford to “wait” for more evidence of higher tariffs’ impact on inflation and economic activity before considering any rate cuts.
For a fourth straight meeting, the FOMC held the federal funds rate steady in a target range of 4.25% to 4.5% on June 18, after lowering that policy rate three times by a total of 100 basis points in late 2024. In their revised, quarterly Summary of Economic Projections, the 19 FOMC participants again projected that by year’s end, the funds rate will be at a median 3.9% (a target range of 3.75% to 4.0%), implying two 25 basis point rate cuts sometime during the remainder of 2025.
The FOMC’s task of assessing risks to its price stability and maximum employment mandates hasn’t gotten any easier. Although signs of labor market softening had proliferated, the Labor Department released a relatively strong employment report a few hours before Bostic spoke. It showed non-farm payrolls rising by 147,000 in June, much more than expected, while the unemployment rate fell to 4.1%, instead of rising to 4.3% a feared.
On the other side of the Fed’s dual mandate, the latest (May) reading on the Fed’s favorite inflation gauge, the price index for personal consumption expenditures, was somewhat higher than expected, showing a 2.7% year-over-year rise in core PCE – before the full impact of tariffs on pricing have been felt.
The outlook for inflation, employment and GDP growth has been further complicated by ongoing changes in trade, tax, regulatory and immigration policies.
President Trump has been leaning increasingly hard on Powell, insulting him and demanding the Fed cut the funds rate all the way to 1%. He has urged Powell to “resign immediately.” Treasury Secretary Scott Bessent, a possible nominee to succeed Powell when he retires next May, has also gotten into the act, saying Wednesday, “I think that the criteria is that tariffs were not inflationary. If they’re going to follow that criteria, I think that they could do it sooner than then, but certainly by September .…”
Nevertheless, less than two weeks after the FOMC left the funds rate unchanged, Powell made clear he and the FOMC will not be rushed. “We think the prudent thing to do is to wait and learn more and see what those effects might be,” Powell told a European Central Bank Forum on Central Banking on Tuesday.
Bostic took much the same position Thursday, echoing many of his Fed colleagues. Essentially, he argued the economy shows no clear signs of needing lower rates and that inflation should remain the primary focus.
“(W)ithout evidence of substantial labor market deterioration, coupled with private sector balance sheets that remain in relatively good health, it feels too early to conclude that a downturn is probable,” he said in prepared remarks. “Again, uncertainty looms large, and I believe patience is in order.”
Citing tariffs and other policy shifts, Bostic said, “a period characterized by such widespread uncertainty is no time for significant shifts in monetary policy. That is especially the case against the backdrop of a still resilient macroeconomy, which offers space for patience.”
Therefore, Bostic added, “I fully support the Committee’s wait-and-see policy prescription at our latest meeting. I believe the Committee must await more clarity rather than move in a policy
direction that it might need to quickly reverse.”
Responding to questions, Bostic sought to deftly balance tariff-related risks to full employment and risks of higher inflation.
He said “everyone has to be open to the possibility that the inflation process falling back to 2% target is not preordained …. We all need to be very cautious.”
On the other hand, Bostic made clear he will be paying very close attention to labor market conditions and watching for weakness.
Asked how long he is willing to wait before cutting rates to guard against such weakness, he replied that “today, if you think about labor markets, they are basically at our target” (presumably referring to the FOMC’s 4.2% longer run unemployment) …. As long as you have one measure at target you can focus on the other one (inflation) more heavily.”
But “the messages on inflation are quite mixed,” he said. If inflation were to continue on the trajectory of the last three to four months “for several more months we would be there (at the 2% target), but all the signs suggest (inflation) is going to go in the other direction.”
“So that’s the current context, in which I’m happy to be patient,” he said.
However, “if we started to see deterioration in the labor market … if we started to see the unemployment rate spiral away from full employment … or if we see signs that employers were really starting to say they are going to be laying off people … that would be a change in circumstances that we would have to take on board,” Bostic said.
“We’re not hearing any of that, but that could change,” he added.
Bostic observed that “there are several schools of thought on how inflation will move in the context of tariffs.’ In one scenario, “the economy has a lot of momentum (and) tariffs increase costs (and) the economy slows down but not into a recession environment,” resulting in “inflation moving away (from target).”
“That would suggest one policy course,” he added, presumably keeping rates up.
In another scenario, “consumers completely revolt (against tariff-related price hikes), and we start to see businesses having to make decisions about laying people off …,” Bostic said. In that situation, “we might see weakness … which would offset inflation pressure .… That would have a different policy prescription.”
“We’ll have to see how that evolves,” he said.
Because of all the uncertainty, “that’s why we’re not doing lot of forward guidance today because the forward guidance would not be very helpful about what we might do,” Bostic said.
Prefacing those policy remarks, the Atlanta Fed President examined developments on the two sides of the Fed’s dual mandate.
Regarding the “maximum employment” goal, Bostic said, “For now, labor market conditions remain broadly healthy, even as signs point to softening.”
“The pace of hiring has slowed, and it is taking job seekers longer to find work,” he continued. “At the same time, layoffs and unemployment remain at low levels, and I don’t yet see signs of serious labor market deterioration.”
And Atlanta Fed surveys conducted through early June “revealed a continuing ‘not hiring-but-also not-firing’ approach,” he went on, although “more firms told us they were devising contingency plans for layoffs should they become necessary.”
As for “price stability,” Bostic said, “inflation has fallen substantially from peaks in mid-2022,” and “the near-term evidence suggests we are arguably approaching the FOMC’s 2% objective.”
He said he “would be pretty comfortable with the inflation outlook,” but for the potential impact of tariffs on prices and other developments.
“To a significant degree, I believe sanguine inflation readings reflect firms’ strategies to delay substantive price increases until the price setters get more clarity on final tariff rates and their implications,” he said.
How tariffs ultimately work their way through the economy “looks like a process that may take a year or more to fully play out,” Bostic said, but he added a note of concern.
“If I’m right, then the US economy will likely experience a longer period of elevated inflation
readings,” he said. “I wouldn’t expect we would see dramatic spikes, but rather a steady progression to the end-state inflation level….”
Bostic went on to warn that, “if this scenario plays out as I’ve described, there is a risk that high inflation could burrow into consumer psychology and lead to unanchored inflation expectations.”
“That would not be welcome, and so I will be watching closely for any evidence that such an unanchoring is starting to occur …,” he said, adding, “we are not yet at a point where elevated inflation is firmly embedded in the psychology of consumers and price setters.”
An Atlanta survey of businesses in his sixth district shows “price change expectations for May 2026 are higher than at any time over the prior two years,” he noted.
As for economic growth, Bostic pointed to improved business sentiment, but said “there is some evidence to support the view that momentum in the economy is stalling.” He cited slower consumer spending.
Opinion at the Fed is hardly monolithic. Governors Christopher Waller and Michelle Bowman say rate cuts could be justified later this month, and 10 of 19 FOMC participants foresaw at least two 2025 cuts based on their economic forecasts. Nonetheless, a host of officials have lent support to the Chair’s wary approach in recent days.
On Wednesday, Richmond Fed President Thomas Barkin likened making monetary policy in the current uncertain atmosphere to “driving through fog” and therefore, the FOMC should be in no rush to change interest rates.
Previously, New York Federal Reserve Bank President John Williams had said, “Maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals, It allows for time to closely analyze incoming data, assess the evolving outlook, and evaluate the balance of risks to achieving our dual mandate goals.”
Similarly, voting Kansas City Fed President Jeffrey Schmid said, “With all this uncertainty, the current posture of monetary policy, which has been characterized as ‘wait-and-see,’ is appropriate…..The resilience of the economy gives us the time to observe how prices and the economy develop.”
Boston Fed President Susan Collins advocated a strategy of “active patience” after saying, “the overall solid current conditions enable the Fed to take the time to carefully assess the incoming data and their implications for the economic outlook and the balance of risks to inflation and economic activity.”
She added that she “expect(s) it will be appropriate to resume gradual policy normalization later this year.”
Minneapolis Fed President Neel Kashkari said he expects two rate cuts this year, beginning in September, but said “if the data called for it, we could hold the policy rate at the new level until we gained greater confidence that inflation was headed back to our target.”
In other comments, Bostic talked about potential changes in the Fed’s Statement on Longer Run Goals and Monetary Policy Strategy, as the FOMC winds up a five-year “framework” review.
One idea, he said, would be “to make the pursuit of stable inflation expectations an explicit guiding light in the Committee’s fundamental policy approach.”
“To be sure, anchoring inflation expectations at the 2% target is already important in the Committee’s strategy,” he said. “But it is worth exploring ways in which the primacy of inflation expectations could be made absolutely explicit.”
Bostic said monetary policymakers must ask two important questions: One, “how do we ensure that we are measuring expectations for what truly matters in the decision making of households and firms? And two, if we are measuring the right things, are we measuring them at the right frequency?”
“That is to say, by strictly adhering to anchoring “long run” expectations, do we risk dismissing shorter-run, or episodic, dynamics in the economy that ultimately work against our price stability goals?” he added.
Bostic warned that a “somewhat troubling fact that may be unfolding at the moment—and is worrisome in the face of the potential tariff shock to the price level—is that longer-run expectations tend to continue to increase even after inflation begins to recede from its previous peak.”
“What would be ideal is for researchers to develop and deploy an early warning alert of unanchoring in inflation expectations as it happens. …..,” he said. “Without a better understanding of how inflation expectations are formed, we risk missing early stirrings of potentially damaging inflation. The resultant monetary policy prescription, therefore, may not be optimal.”
Bostic also spoke about “the thorny set of policy choices that arise when the two mandated goals come into conflict ….”
“We are thankfully not in that situation,” he said. “But with uncertainty buffeting the macroeconomy on many fronts, it is a plausible scenario, and as such merits discussion …..”
If measures of both price stability and maximum employment move away from target, Bostic said the FOMC “would have to choose which of the two needs to be the primary concern in the moment.”
“If both mandated objectives are moving in the wrong direction, then it is incumbent upon the Committee to redouble efforts to divine the true, underlying course of inflation and labor markets …,” he said.