By Michael S. Derby
NEW YORK (Reuters) -Federal Reserve Bank of Atlanta President Raphael Bostic said on Thursday that while the U.S. central bank has made a lot of progress lowering inflation pressures, ongoing risks mean that he’s not yet ready to call for interest rate cuts.
“We have made substantial and gratifying progress in slowing the pace of inflation,” Bostic said in a speech before a gathering held by the Money Marketeers of New York University Inc.
“My expectation is that the rate of inflation will continue to decline, but more slowly than the pace implied by where the markets signal monetary policy should be,” he said.
Bostic said it is too soon to declare victory over high inflation, and that “leaves me not yet comfortable that inflation is inexorably declining to our 2% objective.”
As a result, it could take a while before the Fed has sufficient confidence that the economy is on a path that will allow a cut in interest rates.
“We will likely soon contemplate the appropriate time for monetary policy to become less restrictive,” Bostic said. “Right now, a strong labor market and macroeconomy offer the chance to execute these policy decisions without oppressive urgency,” he added.
Markets have been actively debating the timing of a central bank cut in what is now an interest rate target of between 5.25% and 5.5%. Markets had been eyeing a spring easing in light of rapidly cooling price pressures, but a range of Fed officials have signaled that it will take longer to gain the needed confidence to support lower rates.
In addition, stronger-than-expected data on January consumer prices has raised fears that inflation will not retreat as swiftly as thought, pushing back investor expectations of a rate cut.
Bostic said that relative to his colleagues' collective expectation that the Fed can cut rates three times this year, he had penciled in two cuts for 2024 because he was expecting an uneven retreat in price pressures. The Fed will update those forecasts at its policy meeting next month.
In his speech, Bostic said the economy’s strength in the face of rapid Fed rate hikes and the ability of inflation to fall despite a very strong job market confounds what many had been expecting. It is also possible, he said, that the economy has grown less responsive to changes in monetary policy.
The economy may even have “pent-up exuberance” that could drive up demand again, which represents an upside risk to inflation, he said.
Bostic also said he did not see a reason for the Fed to slow or stop its ongoing balance sheet drawdown, which has seen around $1.4 trillion come off the central bank's balance sheet. He said market liquidity still looked solid and he is watching for signs it may be getting tighter.