–FOMC Must Guard Against Too Little, Too Much Tightening
–Rates Must Become Restrictive to Bring Down Inflation
By Steven K. Beckner
(MaceNews) – Atlanta Federal Reserve Bank President Raphael Bostic said Tuesday that the Fed needs to keep raising interest rates “expeditiously” into a “restrictive” stance to reduce inflation, but he warned against raising rates too much and envisioned a possible slowing of rate hikes at some point.
Bostic, in an essay published by the Atlanta Fed, did not clearly signal how much he thinks the Fed’s policymaking Federal Open Market Committee should raise the federal funds rate at its Sept. 20-21 meeting, but suggested the FOMC needs to act cautiously and prudently after having raised that key money market rate by 75 basis points at its June and July meetings.
Given the lags with which monetary policy works, Bostic said the FOMC needs to carefully assess how past rate hikes are affecting the entire economy. Already, he noted the economy has slowed, and pointed to some signs of moderating inflation.
Bostic, who is not a voter on the FOMC this year, did not dispute Chairman Jerome Powell’s largely hawkish message delivered Friday at the Kansas Cityi Fed’s annual Jackson Hole symposium, but did put more emphasis on the risks of overdoing monetary tightening.
“The FOMC has moved, and will continue to move, expeditiously but carefully to bring inflation back toward our objective of 2 percent as measured by the personal consumption expenditures price index,” he said.
“Even though it will take time to see the full effect of the policy adjustments we have made to date, I don’t think we are done tightening,” Bostic said. “Inflation remains too high, and our policy stance will need to move into restrictive territory if inflation is to come down expeditiously.”
However, Bostic mentioned a number of caveats in determining how much higher and faster rates should go.
“Incoming data – if they clearly show that inflation has begun slowing – might give us reason to dial back from the hikes of 75 basis points that the Committee implemented in recent meetings,” he said. “We will have to see how those data come in.”
Bostic said the FOMC faces “two key questions”:
First, “Given that we are at or near a neutral policy stance, where monetary policy neither stimulates nor restricts economic growth, what level of rates would be appropriately
restrictive? “
Second, “How long will it take monetary policy to affect GDP and inflation?”
As the FOMC contemplates how to answer those questions, Bostic said he and his fellow Fed officials “must weigh the risk of our policy action from both sides – moving either too aggressively or too timidly has downsides.”
“If history ultimately shows that we have not moved aggressively enough, the biggest danger is that inflation becomes entrenched in the minds of consumers and business decision makers,” he continued. “If consumers and companies make spending decisions with the assumption that prices will keep rising, the likelihood increases that inflation will last a long time.”
Moving too slowly could risk inflation becoming entrenched, which “could trigger a self-perpetuating “wage-price spiral” like we saw during the Great Inflation of the 1970s and ’80s,” he warned, adding that it is vital that the Fed closely monitor inflation expectations.
“While we haven’t seen expectations become unanchored – and recent readings in fact show them ticking down slightly – that risk grows the longer inflation stays high,” he said.
But Bostic also warned against raising rates too much. “Like moving too little, being too aggressive with rate hikes entails risk.”
“Most broadly, severe policy tightening can slow economic activity and lead to increased unemployment,” he went on. “In such a scenario, those at the lower end of the income-and-wealth spectrum tend to suffer first and worst, as they do with the effects of the elevated inflation we are trying to wring out of the economy.”
Therefore, Bostic said he is “proceeding carefully and with a healthy dose of humility.”
He added that he “will stay vigilant and closely monitor not only inflation but also labor markets and an array of economic vital signs that help guide us in calibrating the appropriate policy stance.”
Bostic emphasized that “monetary policy does not produce immediate results” and that “our policy tools work with a lag.”
“Monetary policy tightening tends to affect other economic indicators such as the housing market, which has already notably slowed, before it meaningfully influences underlying
inflation,” he elaborated. “That broad impact makes it critical that we pay attention to how all parts of the economy are evolving and remain steadfast if, as is likely, inflation doesn’t fall right away.”
Bostic also stressed that the economic picture is “fuzzy,” so that “economic signals are still scrambled.”
On one hand, he said the data show the economy has “slowed.” On the other hand, “employment growth this year continues strong, averaging 471,000 new jobs a month through July.”
On the inflation front, Bostic said “supply chain problems could be easing… As a result, goods prices have climbed more slowly in recent months.”
But he added, “even as certain inflationary pressures appear to be ebbing, we know we have a fight ahead.”
‘While goods prices show signs of moderating, core services inflation continues to drift upward, and inflation in services prices tends to be more persistent than goods inflation,” he noted. “While the July consumer price index report represented a reprieve in the pace of price increases, it also makes clear that price pressures remain stubbornly widespread and not confined to a few items.”
Contact this reporter: steve@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery contact tony@macenews.com. Twitter headlines @macenewsmacro.