Fed's Bostic Supports More Hikes, Warns of Running Economy Hot

(Bloomberg) -- Federal Reserve Bank of Atlanta President Raphael Bostic said he supports further gradual interest rate hikes and warned that running the economy “hot’’ with too much stimulus could end in a recession hurting lower-income Americans.

“Unless the data talk me out of it, I view a continued, gradual removal of policy accommodation as appropriate until we get to a neutral policy rate,’’ Bostic said Tuesday in the text of a speech in Baton Rouge, Louisiana. While there’s uncertainty about neutral -- the level of rates that neither speed up nor slow down economic activity -- he said “my assessment is that we are still a few rate hikes away.’’

A voting member this year of the Federal Open Market Committee, Bostic backed the decision in September to raise the target range for the federal funds rate to 2 percent to 2.25 percent, the third hike in 2018. The panel projected a fourth increase by December, according to officials’ median estimate, as unemployment has fallen and inflation has met the group’s 2 percent target.

The location of the neutral rate is the subject of debate inside the Fed, with estimates within the committee ranging from 2.5 percent to 3.5 percent. Chairman Jerome Powell has emphasized economists’ inability to know precisely where it lies.

A number of Fed officials have noted there could be temporary benefits from running the economy hot -- pushing the unemployment rate lower to encourage more people to look for jobs and to help lower-income Americans get pay raises. The jobless rate has fallen to 3.7 percent, a 48-year low.

“The key question isn’t whether the high-pressure economy brings new people from disadvantaged groups into the labor market,’’ Bostic said. “Rather, the right question is whether these benefits are durable in the face of the recession that appears to inevitably follow.’’

Citing research from the Atlanta Fed, he added: “We ought to guard against letting the economy slip too far into these high-pressure periods that ultimately impose heavy costs on many people across the economy. Facilitating a prolonged period of low -- and sustainable -- unemployment rates is a far more beneficial approach.”

“I intend to weigh the risk of acting too swiftly and choking off the expansion against the risk of having the economy overheat and get into a situation with rising inflation and inflation expectations that would necessitate a muscular policy response,’’ Bostic said.

The Atlanta Fed president said currently he sees “risks as being tilted to the upside’’ -- a more hawkish view than the committee, which has described risks to the economic outlook as “roughly balanced.”

Bostic said because of strong growth numbers in the second and third quarters, he’s revised up his 2018 projection and his 2019 forecast, though he remains cautious about whether firms will increase long-term investments.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull

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