Why Bostic believes rates should remain at neutral levels

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The fed funds rate is “likely” close to neutral, so the Fed should be patient and not lift rates to restrictive levels, Federal Reserve Bank of Atlanta President Raphael Bostic said Wednesday.

With uncertainty espoused by Main Street and Wall Street about the economy while economic data remain robust, “the appropriate response is to be patient in adjusting the stance of policy and to wait for greater clarity about the direction of the economy and the risks to the outlook,” Bostic told the Chattanooga Area Chamber of Commerce, according to prepared text released by the Fed.

“Should conditions play out along my baseline outlook, I see little need to engage in restrictive monetary policy and push the federal funds rate above a neutral stance,” he continued. “All the available evidence at the moment points to caution regarding firms’ approach to expansion. As long as that caution exists, I suspect it will act as a natural governor, limiting inflationary forces without the need for a muscular stance of policy.”

Reviewing 2018, Bostic called it “a stellar year,” with real gross domestic product up more than 3%, the jobless rate at or below 4% for a good portion of the year, and more than 2.5 million jobs added.

Additionally, inflation (measured by the personal consumption expenditures price index) “trended toward the Federal Open Market Committee’s 2% inflation objective.”

With such strong data, he suggested, the economy “ought to be able to stand on its own, without much support, or accommodation, from monetary policy.”

With the latest rate hike to a range of 2.25% to 2.50%, “the Committee has likely come close to achieving a neutral policy stance — one that is neither providing accommodation nor is being restrictive and attempting to actively slow the economy,” Bostic noted. He said he used the term “likely” since the neutral rate is an estimate, making its exact level uncertain.

Data dependence, he said, includes not just official economic data releases, but also financial market conditions, global economic conditions, “and data from a variety of surveys to keep me abreast of changes in sentiment that may affect business and consumer decision making.”

As for risks, Bostic said, “I view recent market turmoil as not the cause, but a symptom of the various concerns and uncertainties surrounding the outlook. These include slowing global growth, uncertain trade policy, worries over the trajectory of growth domestically, and concern regarding the expected stance of monetary policy.”

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