By Steven K. Beckner
(MaceNews) – Atlanta Federal Reserve Bank President Raphael Bostic said Monday he would be willing to consider “recalibrating” the Fed’s monetary policy stance if the economy proves stronger than expected, but said he can’t envision raising the federal funds rate from near zero until next year at the earliest.
Bostic, a 2021 voting member of the Fed’s policymaking Federal Open Market Committee, said he would want to “normalize” the FOMC’s more unconventional policies – large scale asset purchases and forward guidance – before raising the funds rate.
The timing of monetary firming “really depends, Bostic said in a virtual exchange with his predecessor Dennis Lockhart hosted by the Atlanta Rotary Club. “We’ve got a lot of stimulus in the economy. We are extremely accommodative right now.”
“We’re doing a lot of asset purchases,” he continued. “I think the forward guidance that we’re putting out into our statements is also providing a clear signal about the way we think about things, and I would like to get those in a more normalized place before we move our policy rate.”
“All that said, though, I think there is some possibility the economy could come back a bit more strongly than some are expecting, and if that happens I’m prepared to support pulling back and recalibrating a bit of our accommodation and then considering moving the policy rate,” he went on.
“But I don’t see that happening in 2021,” he said. “A whole lot would have to happen for us to get there, and then we’ll see into 2022, maybe the second half of 2022, or even 2023, whether that might be more in play.”
Bostic, who succeeded Lockhart as Atlanta Fed president since June 2017, was quick to add, “all of that is speculation about a lot of other things going a certain way,, but I think the most important takeaway that people should have is that we’re going to be monitor, and we’re going to do what’s appropriate given the information we have at the time.”
“And we’re not locked into a particular length of time of having any kind of policy stance,” he said. “We really want our policy be informed by what we’re seeing on the ground and make adjustments to our policy stance based on that.”
Bostic had a similar response to a question about how much more fiscal relief is needed.
“We’re learning how long,” he said. “I think our initial notion of what the time horizon for this whole episode is going to be were tremendously optimistic.”
“We’ll just have to see,” he continued. “I’m hopeful that there remains an openness for be us to be recalibrating the length of time that relief is necessary and as we learn more about what’s happening.”
“My job is really to make sure that policymakers know what’s happening,” he added.
He said fiscal stimulus “has been super important and will continue to be.” His comment comes in the wake of enactment of a $900 billion fiscal stimulus package and in expectation of further federal spending programs when the new Congress is seated.
A year ago, before the coronavirus pandemic triggered a series of economically devastating lockdowns, Bostic indicated in an interview for Mace News and NPR that he was prepared to keep the federal funds rate unchanged at 1.5% to 1.75% throughout 2020, but said he would support raising rates if signs of “overheating” appeared. Now, raising rates seems to be further from his consideration.
Nor does Bostic seem eager to reduce the pace of Fed asset purchases from the current $120 billion per month.
At its last meeting on Dec. 16, when the FOMC left the federal funds rate in a zero to 25 basis point range and said it “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”
Applying similar “forward guidance” to asset purchases, the FOMC also said the Fed “will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
Bostic, who will be voting at the FOMC’s first meeting of the year Jan. 26-27, was also asked what he will be watching to determine the appropriate timing of QE tapering and/or liftoff.
Among the factors he said would be readings on consumer confidence, the health of small business and evidence of longer term “scarring” effects of the virus.
One thing that will not trigger monetary tightening, he made clear, is falling unemployment.
“In previous periods the Fed has been proactive to make sure the economy doesn’t overheat so inflation doesn’t become a big deal or a big issue,” he said, but now “given the weaker upward (inflation) pressures we’re going to be comfortable letting the economy run a bit hotter than otherwise for two reasons:
1. “Because we don’t think that the likelihood of overheating is nearly as great from an inflation perspective, and
2. “By doing that we allow ourselves to reap additional benefits by having people who weren’t so connected to the economy start to get job.”
Elaborating on the two sides of the Fed’s “dual mandate,” Bostic said “there is a lot of work left to be done on employment,” while ‘it’s very hard to know what’s happening with inflation because of volatility” in prices. He said the Fed needs to see this price volatility “smooth out to get a clearer picture of inflation trends.
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Contact this reporter: steve@macenews.com.
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