Bostic: Quarter-point US rate increases best to limit risk to economy


By Howard Schneider

WASHINGTON (Reuters) – The impact of higher U.S. interest rates on the economy may only begin to “bite” in earnest this spring, an argument for the Federal Reserve to stick with “steady” quarter-point rate increases, Atlanta Federal Reserve President Raphael Bostic said on Thursday.

“I am still very much of a mindset that slow and steady is going to be the appropriate course of action,” Bostic said in comments to reporters. The cumulative effect of the Fed rate increases “should bite through the spring … Going at a measured pace reduces the likelihood we overshoot” and damage the economy.

But Bostic at the same time said he was ready to keep lifting rates higher if inflation does not slow, and was still mulling how recent, stronger-than-anticipated inflation data might shape Fed policy.

The Fed could be close to a stopping point in the rate increases that have lifted the target federal funds rate from near zero a year ago to a “restrictive” level between 4.5% and 4.75% as of February, said Bostic, who is not a voter this year on interest rate policy. He has penciled in another half percentage point of increases as likely needed, but that depends on what upcoming data show about an economy that continues to outperform expectations.


At this point, he said, the staff at the Atlanta Fed were split in their views about why the rapid rate increases to date have not done more to slow consumer and business spending, with some arguing that even higher interest rates may be needed and others feeling it is only a matter of time before tight monetary policy has its usual influence.

Even the business executives he consults with are of a dual mind, convinced demand for their own goods and services is secure but expecting “the shoe will drop” elsewhere in the economy; intent on hiring more workers in a tight labor market but also expecting they can slow the pace of wage increases.

“We want to be very deliberative,” Bostic said. “Continue to raise rates for a time further until we start to see inflation trend clearly in a way that gives me confidence we can get to 2%.”

The Fed targets a 2% rate of annual increase in the Personal Consumption Expenditures price index, which as of January was increasing at a 5.4% annual rate.

(Reporting by Howard Schneider; Editing by Nick Zieminski)