Exclusive: Fed’s Bostic says idea of ​​September pause is not tied to any looming market rescue

Atlanta Fed President Raphael Bostic, in an exclusive interview with MarketWatch, said his suggestion that the central bank take a “pause” in its push to raise interest rates should not be constructed in any way as a “Fed put,” or belief that the central bank would come to the rescue of markets.

In a Tuesday interview, Bostic said the notion of any sort of “Fed put” was never a factor in his thinking.

“I think it’s a good tale on some level for story books, but it’s not driving how I’m thinking about policy,” he said.

Financial-market conditions have tightened sharply this year as the Fed has begun to raise its benchmark rate in the face of the highest inflation readings in 40 years. The Dow Jones Industrial Average DJIA,
-0.67%
is down 9% this year, while the S&P 500 index SPX,
-0.63%
is off 13% to date in 2022. The yield on the 10-year Treasury note TMUBMUSD10Y,
2,873%
has moved below 3%.

Most Fed officials favor the central bank’s hiking rates by half a percentage point at the next two monetary-policy-setting meetings, in June and July.

Last week, Bostic suggested that a pause in September might make sense, precipitating an upswing in the markets.

Bostic said a pause might be a good idea because the market’s response to the Fed’s shift to raising rates “was far stronger than what we’ve historically seen.”

This raises the possibility that the broader economy will respond quickly to the Fed’s rate hikes, as well, he said.

“I want to make sure I truly understand the pace of change that’s associated with our policy response,” Bostic said.

By September, some of the uncertainty over the economy could be resolved and labor-market imbalances could ease, leading to a “pretty significant reduction in inflation,” he said.

The opposite side of the coin is that inflation could remain higher as supply chains remain broken by overseas events like Russia’s war against Ukraine and the COVID lockdowns in China.

The Atlanta Fed president said he wants to see the central bank move its benchmark rate to a range of 2% to 2.5% toward the end of the year.

At that point, if inflation is not moving down in a significant way, Bostic would be “fully comfortable” moving rates higher into a range that would restrict economic growth, he said.

“The goal is to get inflation down. We’ve got to really tackle it in an intentional, persistent way, ”he said. “I want to be open to both possibilities.”

After the expected rate hikes in June and July, the Fed’s policy rate would be in the range of 1.75% to 2%.

On Monday, Fed Gov. Christopher Waller pushed back on the idea of ​​a break in September, saying he favored half-point rate hikes at the next “several meetings.”

St. Louis Fed President James Bullard has said he wants the Fed to boost the policy rate to 3.5% by the end of the year.

For his part, Fed Chairman Jerome Powell said he wants to raise rates until there is “clear and convincing evidence that inflation pressures are abating and inflation is coming down.”

Powell met with President Joe Biden at the White House on Tuesday. Analysts said the public meeting strengthened the Fed’s hand to combat inflation.

Investors in futures markets have signaled a belief that the Fed will raise rates to 3% by the end of the year and then stop.

Bostic said he was forecasting that inflation, as measured by the personal consumption expenditure index, would slow to just above a 4% annual rate by the end of the year, from 6.3% in April.

Minutes of the Fed’s last meeting show the Fed staff projecting that PCE inflation will slow to a 4.3% rate by the end of this year.

Economic Report: US inflation rate slows to 6.3%, Fed-favored PCE gauge shows, in a sign that price pressures could be peaking

Bostic said some of his contacts are reporting the “first signs” of slower demand, which could factor into the ultimate level the Fed’s benchmark rate would need to reach to get inflation under control.

While there is not yet an economic contraction on the radar, there is “a less willingness to spend freely among certain segments of the population,” Bostic said.

At the moment, the pullback in spending is concentrated among households that had less wealth and savings going into the pandemic, he said. While there is a lot of aggregate savings overall in the economy, the distribution is split in a way that wealthier households hold more of the savings and can weather higher inflation.

“As we go further and further on, the number of families that are in that [favorable] situation is going to fall, and that is why you could see some retrenchment, ”he said.

But Bostic said there is a “lot of momentum in the economy.”

“The economy can slow down for quite some time before it would slip into a more recessionary posture,” he said. “I understand the concern. I don’t think we’re quite there yet. ”

Bostic is not a voting member of the Fed’s interest-rate committee this year. The policy committee is next slated to meet June 14-15.

Fed officials will stop discussing policy after this Friday, June 3, to prepare for the meetings.

Bostic, an expert on housing markets from his prior work at the Department of Housing and Urban Development, said he expected housing markets to cool due to higher mortgage rates.

In “many markets,” this cooling “will not translate into outright reductions in price,” he said. Performance will depend on the economic performance of the local market, rather than the across-the-board phenomenon that became the norm, he said.

On Wednesday, the Fed will launch its “quantitative tightening” program to shrink its $ 9 trillion balance sheet, initially by $ 47.5 billion per month and then by $ 95 billion a month starting in September. That amounts to a little more than $ 1 trillion in reductions each year. Experts generally expect the Fed to reduce its asset holdings by about $ 3 trillion.

Bostic acknowledged that there was some uncertainty in markets associated with the impact of quantitative tightening and that the Fed is going to make sure it understands how the markets are responding.

“We are going to proceed in a steady way,” Bostic said.

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