Bostic says inflation overshoot won’t force Fed to make aggressive moves

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The Federal Reserve is close to meeting its dual mandate, and while he expects inflation to run higher than 2% for a while, it won’t cause the Fed to respond aggressively, Federal Reserve Bank of Atlanta President Raphael Bostic said Wednesday.

“On balance, I view the economy as on track and believe we are close to mandate-consistent outcomes for both inflation and employment,” Bostic told an audience in Jacksonville, Fla., according to prepared text released by the Fed. “Given that measured inflation is already effectively on target, I won’t be surprised to see a modest overshoot of our longer-run target. In fact, my own forecast is that, even with further gradual removal of monetary policy accommodation, inflation is likely to run a bit above 2% for a while.”

An overshoot of the Fed’s 2% target would not “in and of itself, necessitate a more aggressive policy response. Rather, it is a feature of a well-calibrated approach that moves monetary policy to a neutral stance that will support both strong labor market conditions and our longer-run symmetric inflation goal,” Bostic said.

The reaction to proposed trade policy changes and consumers’ response to tax reform must be monitored, he noted.

Tax reform has yet to spur “a noticeable acceleration in consumer spending,” he noted, while future spending growth, according to anecdotes and surveys, remains relatively stable.

“I expect to see a recovery in consumer spending over the balance of the year, but as of yet I don’t see an acceleration that would risk a development of imbalances between supply and demand,” Bostic said. He expressed concern that tax cuts have not spurred investment spending on equipment either.

“It’s possible that uncertainty about changes in trade policy may be offsetting some of the impact that might otherwise be generated by the tax legislation,” he said.

While his discussions with businesses in his District indicate most are “reasonably satisfied with the current state of the economy,” he added, “their attitude shifts when we ask them about the future. Swelling optimism over tax policy in the beginning of the year has now been replaced almost completely by uncertainty regarding the proposed tariffs and the possibility of a trade war.”

The uncertainty could be pushing companies to defer capital expenditures.

While the labor market is tight, Bostic said he wouldn’t call it “overheated.”

As for the Personal Consumption Expenditures (PCE) price index hitting 2% on an annual basis, and core PCE at 1.9%, Bostic called it “a significant development.”

Bostic predicts GDP growth of 2.5% this year, slowing to near 1.75% in the medium term.

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