Bostic says higher rates may be needed

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The Federal Reserve should continue to move to a neutral policy rate, Federal Reserve Bank of Atlanta President Raphael Bostic said Friday, but warned he may have underestimated underlying demand, which would suggest the need for "a higher path for rates than what I had been thinking.”

“Current conditions suggest, to me, that we ought to get to a policy stance where our foot is neither on the gas pedal — what we call an accommodative policy — nor on the brakes — what we call a restrictive policy,” he said in a speech in Atlanta, according to prepared text released by the Fed. “Such a neutral policy position would allow the economy to stand on its own.”

Data has been stronger than expected, he noted, “So much stronger, in fact, that the central question in my mind is whether the apparent strength in GDP and job growth is a signal that I have materially underestimated the underlying momentum of aggregate demand. If that’s the case, the potential for overheating would require a higher path for rates than what I had been thinking.”

Local business leaders he spoke with were “upbeat” about the economy with most seeing demand near or slightly above their expectations. “That said, my contacts generally indicated that they have not materially revised their outlooks for the remainder of 2018 and 2019,” Bostic noted.

Future capital investment spending plans especially were not altered. “Businesses’ investment strategies are driven by demand fundamentals,” he said. “In this environment, business leaders have not yet bought into a significant persistent pickup in demand beyond their current capabilities to meet that demand.”

Trade and tariff issues also concern these contacts, Bostic added, “but I get the sense that business leaders have become inured to the seemingly endless string of day-to-day fluctuations in the business environment. So much so, that it is dampening their reactions to good news as well.”

While consumer spending has picked up, he said, it hasn’t been in larger purchases, such as cars or appliance. “A reasonable interpretation of this behavior is that households are exercising prudence, not wanting to take big, irreversible bets,” which shows caution on the part of households.

Inflation should stay near 2%, he said.

“[T]here was a marked uptick in the reported ability of firms to pass on cost increases,” Bostic said, especially for firms that were subject to tariff- and freight-related cost increases.

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Monetary policy Raphael Bostic Federal Reserve Federal Reserve Bank of Atlanta FOMC