Atlanta Fed’s Bostic: Fed should proceed to neutral rate

Atlanta Federal Reserve Bank President, Bostic speaks with Reuters in Stanford
FILE PHOTO - Atlanta Federal Reserve Bank President, Raphael Bostic speaks with Reuters in an interview at Stanford University's Hoover Institution in Stanford, California, U.S., May 4, 2018. REUTERS/Ann Saphir

December 6, 2018

By Howard Schneider

INDIANAPOLIS (Reuters) – Atlanta Federal Reserve bank president Raphael Bostic on Thursday said he felt the Fed should continue raising rates towards a “neutral” level, noting that despite being “beset by increasing uncertainties” the U.S. economy remained strong.

“I’m not seeing clear signs of overheating, nor am I seeing any indications of a material weakening in the macroeconomic data at the moment,” Bostic said in written remarks that largely looked beyond recent market turbulence, and called for a cautious move by the Fed to a neutral interest rate.

“We’re within shouting distance of neutral, and I do think neutral is where we want to be,” Bostic said, referring to a level of interest rates that neither encourages nor discourages household and business spending.

Bostic’s remarks are largely in line with those of other Fed officials in recent days who appeared ready for now to continue raising rates, confident in the economy’s footing even while acknowledging risks had developed.

If approved as expected when the Fed meets in two weeks, it will be the fourth Fed rate increase of 2018, the fastest pace since the central bank began tightening policy three years ago this month.

Bostic’s comments were included in a written text delivered at an economic forum in Atlanta, where he appeared without the opportunity for follow up questions by audience members or the media.

A voter on interest rate policy this year, Bostic spoke as the Fed neared its blackout period during which officials will no longer comment ahead of the December meeting, and after a week in which markets aggressively began to doubt how much longer the Fed can continue raising rates.

Stock markets cratered in recent days over doubts about the Trump administration’s ability to resolve global trade tensions, which Fed officials say are now being broadly felt in the form of rising prices for some goods and business uncertainty that may suppress investment. Trade issues figured prominently in the Fed’s Beige Book of anecdotal reports about the economy this week, as did the fact that businesses indicated they have had to slow hiring because they cannot find enough workers.

Bond markets also sent signals that could be construed as a loss of faith in future growth.

As the Fed raises its short term policy rate, a host of other rates, from credit cards to home mortgages, rise as well. Some parts of the economy that are sensitive to such financing costs, such as construction, have shown signs of slowing, evidence that after eight rate increases the Fed’s actions may have begun to bite.

Market disruptions of the sort seen this week have caused the Fed to pause its policy plans in the past. But many veteran Fed analysts and Fed officials have said the turbulence has yet to hit the Fed where it hurts — in evidence that the U.S. economy is at the cusp of a major slowdown or heading to recession.

Driven by falling oil prices, technical investment strategies and some sense overseas growth may slow, recent market developments have “absolutely no meaning for the outlook for U.S. growth,” Cornerstone Macro analyst Roberto Perli wrote on Thursday.

Futures markets have taken a different stance, with investors expecting just one more rate increase next year, compared to the three increases policymakers foresaw for 2019 in projections they issued in September.

New projections will be published when the Fed meets in two weeks, a comprehensive glimpse of whether the combination of market volatility and real economy “headwinds” have begun to change minds.

(Reporting by Howard Schneider; editing by Chizu Nomiyama)