Fed’s Raphael Bostic sees no need to rush on rate cuts

ATLANTA Federal Reserve Bank of Atlanta president Raphael Bostic on Friday (Oct 18) made the case for patient reductions in the central bank’s policy rate to somewhere between 3 per cent and 3.5 per cent by the end of next year, a pace that would get inflation down to its 2 per cent target by then and keep the US economy out of recession.

“I’m not in a rush to get to neutral,” Bostic told the Mississippi Council on Economic Education Forum on American Enterprise in Jackson, Mississippi. “We must get inflation back to our 2 per cent target; I don’t want us to get to a place where inflation stalls out because we haven’t been restrictive for long enough, so I’m going to be patient.”

At the same time, he said, he envisions further cuts to the Fed’s target for short-term borrowing costs, now in the 4.75 to 5 per cent range.

“If the economy continues to evolve as it does – if inflation continues to fall, labour markets remain robust, and we still see positive production – we will be able to continue on the path back to neutral,” he said.

A neutral Fed policy rate – where borrowing costs neither stimulate nor restrict economic growth – is probably in the 3 per cent to 3.5 per cent range, he said. Inflation, currently at 2.2 per cent by the Fed’s preferred measure, will likely get to the Fed’s 2 per cent target towards the end of 2025, and “that should be sort of the timetable for when we should get to neutral,” he said. Financial markets are currently pricing in two quarter-point interest rate cuts before the end of the year and further reductions next year, likely bringing the policy rate to a 3.25 to 3.5 per cent range by September 2025.

The Fed reduced its policy rate by a bigger-than-expected half-of-a-percentage point last month to keep borrowing costs from cooling the labour market too sharply. Since then, readings on the job market have come in stronger than expected, with monthly job growth accelerating and the unemployment rate ticking down to 4.1 per cent.

Bostic has said he expects only a single quarter-point cut over the last two Fed meetings of the year.

“A recession has never been in my outlook,” Bostic said. “I have always felt that there was enough momentum in this economy to absorb the restrictiveness of our policy and drive inflation back down to its 2 per cent target. I’m grateful that that’s been playing out so well. But the job is not done.” REUTERS