By Howard Schneider
WASHINGTON (Reuters) – Continued high inflation won’t necessarily force the Federal Reserve to raise interest rates higher than expected, but monetary policy will have to remain tight “until well into 2024,” Atlanta Fed President Raphael Bostic said in an essay released on Wednesday.
In his first policy comments since data showed the U.S. central bank’s preferred measure of inflation rose unexpectedly in January, Bostic said the federal funds rate needed to rise to a range between 5.00% and 5.25%, the same level most Fed policymakers projected as of December, and which Bostic had also penciled in.
Since those projections were released, job and inflation numbers have come in hotter than expected, but have not led Bostic to alter his underlying view.
But, he said, the Fed’s target policy rate would need to remain elevated for some time to come, with the central bank stolidly against “reversing course” until it is clear inflation is subsiding.
“A narrative has gained momentum among some commentators that the Fed should consider reversing its course of raising the federal funds rate lest we go too far and cause undue economic hardship,” Bostic wrote. “History teaches that if we ease up on inflation before it is thoroughly subdued, it can flare anew … We must determine when inflation is irrevocably moving lower. We’re not there yet.”
Bostic comments align him with what has become a common view at the Fed. Since the last inflation reports were released, officials – even the more hawkish – have been reluctant to push their interest rate projections higher, and instead have emphasized credit conditions may instead need to stay tighter for longer.
The aim, Bostic said, is to find the “delicate balance” of raising the target federal funds rate to a level the economy can weather without a dramatic downturn, but that will slow demand and curb inflation over time.
“This will allow tighter policy to filter through the economy and ultimately bring aggregate supply and aggregate demand into better balance,” said Bostic, who does not have a vote this year on the Fed’s interest rate policy.
The Fed is expected to raise the federal funds rate another quarter of a percentage point, to a range between 4.75% and 5.00%, at its March 21-22 policy meeting. That would put it close to the stopping point Bostic and others have cited.
Policymakers will also issue new economic and interest rate projections. While many analysts and investors expect the Fed’s interest rate “dot plot” to show additional rate hikes for the year, none of the Fed officials who have spoken since the most recent inflation data was released have said it caused them to shift their view of appropriate policy.
The Personal Consumption Expenditures price index was rising at a 5.4% annual rate as of January, more than double the Fed’s 2% goal.
(Reporting by Howard Schneider; Editing by Paul Simao)
