© Bloomberg. Raphael Bostic, president and chief executive officer of the Federal Reserve Bank of Atlanta.
(Bloomberg) — In an interview with Bloomberg on Monday, Federal Reserve Bank of Atlanta President Raphael Bostic discussed his outlook for monetary policy and the US economy.
Here’s a partial transcript of highlights from the interview:
Q. What was your takeaway from the strong employment report?
Bostic: “It was much larger than I had expected. I actually kind of did a double take when I saw the number because nobody in the forecasting space was thinking about this. And when we talked to our business contacts within the sixth district, nobody there was talking about the world like that either. So it really did come as quite a big surprise.”
“The question about what it means is actually a harder question to give a definitive answer for. This is one data point and it is very different than what we’ve seen in some of the other contexts. We’re going to do a deep dive on our side to really try to figure out what’s going on and how that number conforms or relates to the things that people have told us as their experiences.”
“If this strength is sustained and we see this over several months, then it would suggest that maybe some of the economic slowdown has not been as robust as possible and that imbalances between aggregate supply and aggregate demand will persist for a longer period of time. If that’s the case, it’ll probably mean we have to do a little more work. And I would expect that that would translate into us raising interest rates more than I have projected right now.”
“If on the other hand this is a one-time deal or something that really becomes an anomalous reading over a six-month period, then I’m inclined to look through this a bit. And depending on the other information that comes in, if it is along the trajectory that I expect, then I don’t think it necessarily has to impact the trajectory of policy.”
Q. What does strength in both the household and establishment surveys say?
Bostic: “It’s hard to know that for sure. Look, we know that the labor market is tight. It’s been tight for a long time and pretty much all of my colleagues and I have been talking about that for a very long time and the unemployment rate’s been dropping even without outsize numbers like this.”
“Let me also say that there were parts of this report which would suggest that, well, maybe this isn’t so different. So you think about wages. The average wage in this continued its easing in ways that would suggest that maybe that some of this heat is not really as sustained as it might be otherwise. And so that’s why I really want to go back to this notion that I think we just need to do a deep dive to get a sense of a real, more comprehensive understanding.”
Q. Is a 50 basis-point move potentially on the table?
Bostic: “So I can’t really tell you the answer to that question. Look, I hope people have heard my view on this that everything is on the table at every meeting.”
“I try to let the data guide me as we get closer and closer to the meetings and we get a lot of information that helps give me a sense of what the right approach is. So right now, I actually think that the ratcheting down of the pace to 25 basis points is fully appropriate. We’re trying to get the whole economy and people’s expectations about where we are back to a more normalized level.”
“A year ago the notion that we would do anything other than 25 basis points would’ve been shocking and distressing to the broader financial markets. It’s important that was just a year ago. So I think keeping that context in mind is important and by moving at 25 basis points, that is a meaningful move.”
“But if it turns out that we get a lot of numbers that suggest the economy is moving rapidly off of the trajectory it was on, I’d consider whatever I needed to consider. But that’s not my baseline right now.”
Q. You have said that your peak rate is 5%-5.25%. Is that still your base case?
Bostic: “Yes, that’s still my base case for now. I think my approach over the next several weeks is going to be just sit tight, take it all in, and then kind of rerun as we get closer to the time I need to submit the next SEP which is at our next meeting. So we have a whole process that we go through to try to figure out where I think I should be comfortable in terms of the policy trajectory and I’m going to really just lay out that process and not try to overthink in the middle or really at the beginning of the process and front-run my process.”
Q. There’s a risk it would go higher?
Bostic: “Yes. And there’s always been that risk. If we’re going to be data dependent, then if the data comes in and tells us something different, we should adjust and adapt.”
Q. Is the first quarter going to be stronger than expected?
Bostic: “This economy has performed strongly for a lot of the pandemic. And it has consistently surprised where many analysts have been in terms of expectations for performance. So it wouldn’t surprise me if we saw this quarter or the next come in stronger than people expect right now.”
“But, ultimately for me the question is, what’s happening in terms of imbalances between supply and demand and I’m going to stay focused on trying to make sure that our policies work to reduce those imbalances so that inflation can get back down to where we need it to be because inflation is too high.”
“And job one for us has got to be to get inflation back under control. And I’m going to do all I can to see that we do that.”
Q. Markets still see a rate cut by year-end. What do you think?
Bostic: “Well, the markets can think what the markets think. From what I can tell, a lot of the discrepancy between where we are and where markets are has to do with the expectations about the trajectory of inflation over this coming year. Their projections are that inflation is going to fall faster than what I think it will.”
“I’d be happy to be wrong. Like, if the economy rebounds faster and we’re back in balance sooner than I expect, that would be a good outcome for the US economy. And so this would be one instance where being wrong would make me happy.”
Q. Do you still not see a rate cut this year or next?
Bostic: “Yes, that’s exactly it. And I’m still there. My expectation about how inflation is going to proceed over this year is that we’ll make progress in getting toward 2%, but there’ll still be some ways to go before year’s end. So I have inflation in the low 3s and I think there are some analysts who have it like in the mid-2s almost. And that’s a big difference.”
“The way inflation dynamics work, those last few tenths of a point can take a long time to be realized. And so I want to make sure that we are in the right place before we start easing off our policy because the most important thing at this stage is to get our price-stability measure as close to target as possible.”
Q. What’s needed for a pause in hikes?
Bostic: “If inflation moves closer to the target faster than I expect, that will tell me that we’re nearing a point where we’re stopping and just letting our restrictive stance do its work would be more appropriate. I don’t think we’re there right now.”
“This jobs report actually suggests that things may be a bit more complex and nuanced than maybe some might have thought before. And that actually puts a premium on the need for us to do the legwork to understand exactly what’s happening in the economy.”
Q. After a pause, would there be the option to restart hikes later?
Bostic: “Yes, I like optionality, so I never want to foreclose any action, but I do think that a lot of this will depend on how the economy evolves relative to my expectations. And again, data dependence would suggest that we should not just take a stance, put our head in the sand and never pay attention to what’s going on or never respond to it. So I think it’d be dangerous for people to think that we are a 100% wedded to any trajectory moving forward.”
“I’ve talked to a lot of my colleagues about this. We understand what data dependence means and we’re going to try to avoid getting too locked in to just one approach. The world is complicated and so we need to be open to the possibility that that new things happen that would mean that our policy stance has to move to a different place.”
Q. Is a soft landing for the US economy more likely now?
Bostic: “I don’t often do the probabilistic thing. What I will say is that I’ve said for a long time that I thought there’s a lot of momentum in the economy and that there was a good chance that that momentum was going to be sufficient to absorb our policy tightening in ways that could help us avoid a recession. I still think that, and I think the jobs number that we just saw on Friday suggested there’s still considerable momentum.”
“If we can keep that momentum going while at the same time seeing downward pressure on prices — we’re not seeing wages elevate in a significant way, maybe we see more people come back to the workforce so that supply becomes more part of a contributor to this reduction in the imbalance — then I think it’s very possible that we could avoid a contraction and that’s been sort of what my expectation has been and I’m hopeful that that’s what will be realized.”
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