By Steven K. Beckner
MaceNews) – Atlanta Federal Reserve Bank President Raphael Bostic spoke optimistically about the economic outlook Tuesday, but made clear improving prospects have not yet made him more inclined to firm monetary policy.
Bostic, a voting member of the Fed’s policy making Federal Open Market Committee, downplayed the risks of “overheating” or troubling inflation and said the FOMC can allow the economy to “run hot” more than in the past.
The economy still has a long way to fulfill the FOMC’s “maximum employment” and average 2% inflation goals, Bostic said in a webinar hosted by the World Affairs Council of Atlanta and moderated by former Atlanta Fed President Dennis Lockhart.
Bostic also indicated a lack of concern with rising bond yields.
Bostic joined in the FOMC’s unanimous March 17 vote to leave the federal funds rate in a zero to 25 basis point target range and to continue buying $120 billion per month in Treasury and agency mortgage backed securities.
The FOMC reiterated “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 percent and is on track to moderately exceed 2 percent for some time.” And it said it would keep buying bonds at the recent pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
In their March 17 Summary of Economic Projections, FOMC participants revised up their forecasts of GDP growth to 6.5% on a fourth quarter over fourth quarter basis, up from 4.2% in the December SEP.
But recent government statistics have shown a slowing of economic activity. Retail sales fell 3% last month, while industrial production slipped by 2.2%.
Nevertheless, Bostic described himself as “fairly optimistic.” Noting that there is less uncertainty than in January, that the most recent $1.9 trillion fiscal stimulus package will provide support through at least mid-year and that more and more Americans are getting vaccinated against the corona virus, he anticipated that “we could see pretty significant growth through the summer as people get engaged” in the economy.
Bostic said he is “hopeful” that non-farm payrolls could start rising by one million per month.
However, with payroll employment still down 9 ½ million compared to pre-pandemic levels, he said “there is still a long ways to go. There is some excess capacity that businesses have.”
“We still have a ways to go before we can exhale,” he added.
The Fed is also far from achieving its 2% average inflation goal, Bostic suggested. Because of misleading comparisons to last year’s soft price readings and because of resurgent demand, he acknowledged “we could see inflation readings that come in pretty high” in coming months. But he stressed “I don’t think that will give us a real signal of things.”
Because inflation has run below 2% for so long, he said it must go “a ways before we’ve fully satisfied with that part of our mandate going forward.”
Besides, he said, “I don’t think we’re fully through the pandemic crisis,” and “there is still uncertainty,” particularly about the virus.
So, Bostic said “we still have to be very vigilant at this point and not let our guard down.” Current monetary policy is “very appropriate” and needed to “provide maximum support that makes sure we get through this crisis and get to the other side,” he said, hinting that the FOMC will go slow in making policy less lax.
Under the new policy framework announced last August, “we will be willing to let the economy run a little hotter, because we have not seen inflation become a problem as unemployment fell to very low levels …,” he said. “We’re going to let that play out …. until we make significant progress both in terms of inflation and employment .…”
“We’re going to be where we are for a while because we have a long ways to go,” he added.
Recalling that the unemployment rate fell well below 4% before the pandemic without any increase in inflation, Bostic said that “suggests we weren’t on the cusp of letting the economy overheat.”
Based on that experience, he said, “we’re going to be not overly prescriptive … as we see the unemployment rate drop to low levels historically, we’re going to wait to see inflation moving on a trajectory going forward.”
Bostic said this means the FOMC will keep rates “lower for longer than in the past.”
Were inflation to run at 2.4%, he said “that’s not going to create a lot of angst on my part,” although an inflation rate of 2.8% “might lead me to be a little more concerned.”
Bostic added the slight caveat that “if we see something substantially different going on we will take that on board.”
Asked about the risks of “overheating,” he conceded that it’s possible conditions could “get so tight and businesses have to get so aggressive that they start paying unsustainable wages …,” but he said, “I just don’t see any of that happening now .… We’re so far away from extreme upward pressure on prices and wages.”
Bostic said “risks in credit markets are extremely low” and said he is “not seeing signs that’s going to change.”
As Bostic spoke, the 10-year Treasury note was trading above 1.75%, compared to 0.9170% at the start of the year and as low as 0.3980% last March. But, like many of his colleagues, he said he’s not worried about the uptrend.
He attributed the steepening of the yield curve to greater “optimism about the trajectory of the economy” along with people coming to understand that “we (on the FOMC) are pretty serious about getting inflation to where 2% is an average.”
Bostic was asked whether the Fed might reintroduce something like Operation Twist or change the composition of its asset purchases to exert downward pressure on long rates.
While “we don’t take any tools off the table preemptively,” he said, “right now I’m pretty comfortable with where the financial markets stand today” and does not see a “need to do very much to manage that market.”
The fact that markets are functioning well “gives me some comfort,” he added.