Two Fed Officials Urge Patience Amid Rising Economic Uncertainty

(Bloomberg) -- Two regional Federal Reserve presidents urged policy caution from the U.S. central bank amid mounting economic uncertainties and recent volatility in financial markets.

Federal Reserve Bank of Atlanta President Raphael Bostic and Dallas’s Robert Kaplan, both among the more dovish Fed officials, stressed the need to proceed with care and keep a close eye on incoming data.

“I currently think we’re within shouting distance of neutral, and I do think neutral is where we want to be,’’ Bostic told an economic outlook luncheon Thursday hosted by the University of Georgia. Kaplan, in an earlier interview on CNBC television, said “at this stage, you’re going to hear me be a lot more cautious and counsel patience.”

Chairman Jerome Powell last week said interest rates were moving close to the range of estimates that Federal Open Market Committee participants considered to be neutral -- neither stimulating growth nor restricting it -- and would move carefully next year in reaction to incoming data.

The FOMC is expected to raise rates by a quarter percentage point for the fourth time this year at its Dec. 18-19 meeting, though investors have scaled back their bets on a move somewhat to just under 70 percent.

2019 Forecast

Odds for further policy tightening in 2019 have come down sharply amid a rout in stock markets and a drop in bond yields to below 3 percent on 10-year Treasuries. Investors now see less than one move next year compared with three penciled in by the Fed in September, though that forecast will be updated at their upcoming meeting.

Bostic, who votes on policy this year, said the FOMC was meeting its objective of maximum employment, or may have overshot that mark, and inflation was near the 2 percent target but might have turned “modestly weaker’’ lately.

“The U.S. economy has been beset by increasing uncertainties that may slow its growth, such as international trade tensions, the potential slowing of the global economy, and a recent bout of financial volatility,” Bostic said. In recent months, Bostic has expressed concern over the possible inversion of the Treasury yield curve, which he didn’t address in his remarks Thursday.

‘Very Gradual’

Still, he added, “A risk management approach requires that we at least consider the possibility that unemployment rates that are lower than normal for an extended period are symptoms of an overheated economy.”

Kaplan, who doesn’t vote on policy until 2020, has been advocating a gradual rate path for some time, but his comments recently suggest he’s taking a more cautious turn. He said uncertainty over tariffs and rising input costs that threaten to erode profit margins are both weighing on the outlook. His Fed expects strong 2018 economic growth to fade to a more muted level in 2019 as fiscal stimulus wanes. And because inflation has remained tame, he said that outlook merits patience.

“We ought to be very gradual and patient here, inflation -- in my judgment -- isn’t running away from us,” Kaplan said when asked if markets were over-pricing a rate increase at the December meeting. Kaplan said he wasn’t going to comment on market pricing and was “not going to judge or pre-predict what we’re going to do.”

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;Jeanna Smialek in New York at jsmialek1@bloomberg.net

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

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