Exclusive: Fed’s Bostic says idea of ​​September break not tied to imminent market bailout

Atlanta Fed Chairman Raphael Bostic, in an exclusive interview with MarketWatch, said his suggestion that the central bank take a “pause” in September in its efforts to raise interest rates should by no means be interpreted as a “Fed put” or as a belief that the central bank would come to the rescue of the markets.

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

“I think it’s a good story on some level for the history books, but that doesn’t determine how I think about politics,” he said.

Financial market conditions have tightened sharply this year as the Fed began raising its benchmark rate in the face of the highest inflation rates in 40 years. The Dow Jones Industrial Average DJIA,
is down 9% this year, while the S&P 500 SPX index,
is down 13% so far in 2022. The yield on the 10-year Treasury note TMUBMUSD10Y,
dropped below 3%.

Most Fed officials favor a central bank rate hike of half a percentage point at the next two monetary policy-setting meetings, in June and July.

Last week, Bostic suggested a pause in September might make sense, precipitating a rally in markets.

Bostic said a pause might be a good idea because the market response to the Fed’s rate change “has been much stronger than what we’ve seen historically.”

That raises the possibility that the broader economy will also react quickly to Fed rate hikes, he said.

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

By September, some of the uncertainty about the economy could be resolved and labor market imbalances could ease, leading to a “fairly large reduction in inflation”, he said.

The flip side is that inflation could stay higher as supply chains remain broken by events abroad like Russia’s war on Ukraine and COVID lockdowns in China.

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

At this point, if inflation doesn’t come down significantly, Bostic would be “quite comfortable” moving rates higher into a range that would constrain economic growth, he said.

“The goal is to get inflation down. We really have to tackle that intentionally and persistently,” he said. “I want to be open to both possibilities.”

After the rate hikes expected in June and July, the Fed’s key rate would be between 1.75% and 2%.

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

St. Louis Fed President James Bullard said he wants the Fed to raise the key 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 compelling evidence that inflationary pressures are easing and inflation is coming down.”

Powell met with President Joe Biden at the White House on Tuesday. Analysts said the town hall meeting strengthened the Fed’s hand in fighting inflation.

Futures investors have signaled that they believe the Fed will raise rates to 3% by the end of the year and then stop.

Bostic said he expects inflation, as measured by the personal consumption expenditure index, to slow to just above an annual rate of 4% by the end of the year, from 6 .3% in April.

Minutes from the last Fed meeting show that Fed staff expect PCE inflation to slow to a rate of 4.3% by the end of this year.

Economic report: US inflation rate slows to 6.3%, according to Fed-favored PCE gauge, a sign price pressures may be peaking

Bostic said some of his contacts are reporting “early signs” of a slowdown in demand, which could factor into the ultimate level the Fed’s benchmark rate should reach to keep inflation under control.

Although there is no economic contraction on the radar yet, there is “less willingness to spend freely among certain segments of the population,” Bostic said.

At the moment, the decline in spending is concentrated among households that had less wealth and savings before the pandemic, he said. Although overall there is a lot of aggregate savings in the economy, the distribution is divided such that wealthier households hold more of the savings and can cope with higher inflation.

“As we move forward, the number of families that are in this [favorable] the situation will fall, and that’s why you might see some pullback,” he said.

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

“The economy may slow for a while before slipping into a more recessive posture,” he said. “I understand the concern. I don’t think we’re there yet.

Bostic is not a voting member of the Fed’s interest rate committee this year. The next steering committee meeting is scheduled for June 14-15.

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

Bostic, a housing markets expert from his previous work at the Department of Housing and Urban Development, said he expected housing markets to cool due to rising mortgage rates.

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

On Wednesday, the Fed will launch its “quantitative tightening” program to reduce its balance sheet by $9 trillion, initially by $47.5 billion per month, then by $95 billion per month starting in September. That’s just over $1 trillion in reductions every year. Experts generally expect the Fed to cut its holdings by about $3 trillion.

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

“We’re going to proceed on a regular basis,” Bostic said.