Slowing inflation will tell when to pause, says Fed’s Bostic

Here is a partial transcript of the highlights:

Q. What was your takeaway from the strong jobs report?

Bostic: “It was much bigger than I expected. The truth is that I looked twice when I saw the figure, because no one in the projection field had thought of this. And when we talked to our business contacts in the Sixth District, no one talked about the world like that either. So it really was a big surprise.”

“The question of what it means is actually a harder question to give a definitive answer. This is a piece of information and it is very different from what we have seen in other contexts. We’re going to do a deep dive on our end to try to really figure out what’s going on and how that number fits or relates to things that people have told us like their experiences.”

“If this strength holds and we see it for several months, then it would suggest that perhaps some of the economic slowdown has not been as strong as possible and that aggregate supply and aggregate demand imbalances will persist for a longer period of time. long. If that’s the case, it will probably mean we have to work a little harder. And I would expect that to translate into us raising interest rates more than anticipated right now.”

“If, on the other hand, it’s a one-time thing or something that really becomes an abnormal reading over a six-month period, then I’m inclined to look at this a bit. And depending on other information that comes in, if it follows the trajectory that I expect, then I don’t think it has to necessarily affect the trajectory of the policy.”

Q. What does strength say in household and establishment surveys?

Bostic: “It’s hard to know for sure. We know that the job market is tight. It’s been tight for a long time and almost all my colleagues and I have been talking about it for a long time, and the unemployment rate has been falling even without extraordinary numbers like this.”

“Let me also say that there were parts of this report that would suggest that maybe this is not so different. Let’s think about salaries. The average wage on this continued to ease in a way that would suggest that perhaps some of this heat is not as sustained as it might otherwise be. That is why I want to return to the idea that we need to go deeper into the subject to understand it better”.

Q. Is a 50 basis point move potentially on the table?

Bostic: “So I can’t answer that question. Look, I hope people have heard my take on the fact that everything is on the table at every meeting.”

Q. That’s right.

“I try to let the data guide me as we get closer and closer to meetings and we get a lot of information that helps me figure out what the right approach is. So right now, I think the slowing down to 25 basis points is entirely appropriate. We are trying to get the economy as a whole and people’s expectations of where we are back to a more normalized level.”

“A year ago, the idea of ​​us doing anything other than 25 basis points would have been shocking and distressing for financial markets in general. It’s important that this was only a year ago. So I think keeping that context in mind is important and as we move 25 basis points, it’s a significant move.”

“But if it turns out that we have a bunch of numbers that suggest that the economy is moving rapidly off the trajectory that it was on, I would consider what I had to consider. But that’s not my baseline right now.”

Q. You’ve said your top rate is 5% to 5.25%. Is that still your base case?

Bostic: “Yeah, that’s still my base case for now. I think my approach for the next few weeks is going to be to sit down, take it all in, and then repeat it as we get closer to the time that I have to present the next SEP (summary economic projections), which will be at our next meeting. So we have a whole process that we go through to try to figure out where I think I should be comfortable in terms of political trajectory and I’m going to lay out that process and not try to think too much in the middle or really early on in the process and get ahead of my process”.

Q. Is there a risk that it will go higher?

Bostic: “Yes. And there has always been that risk. If we’re going to rely on data, then if the data comes in and tells us something different, we need to adjust and adapt.”

Q. Will the first quarter be stronger than expected?

Bostic: “This economy has been a strong performer through much of the pandemic. And it has consistently surprised many analysts when it comes to performance expectations. So I wouldn’t be surprised if this quarter or the next one were stronger than what people are expecting right now.”

“But ultimately, for me, the question is what’s going on in terms of demand-supply imbalances, and I’m going to remain focused on trying to make sure that our policies work to reduce those imbalances, so that inflation it can get back to where we need it to be, because inflation is too high.”

“And the first task for us has to be to get inflation back under control. And I’m going to do everything in my power to get it.”

Q. The markets are still expecting a rate cut by the end of the year. What do you think?

Bostic: Well, the markets can think what the markets think. From what I see, much of the discrepancy between where we are and where the markets are has to do with expectations about the path of inflation over the next year. Their forecasts are that inflation is going to fall faster than I think”.

“I would be happy to be wrong. For example, if the economy picks up faster and we get back to equilibrium sooner than I expect, that would be a good outcome for the US economy. So this would be a case where being wrong would make me happy.”

Q. Still don’t see a rate cut this year or next?

Bostic: “Yeah, that’s exactly it. And I’m still there. My expectation regarding how inflation will evolve throughout this year is that we will advance towards 2%, but there will still be a long way to go before the end of the year. I place inflation around 3 points and I think some analysts place it around 2 points. And that’s a big difference.”

“The way inflation dynamics work, those last few tenths of a point can take a long time to come true. And so I want to make sure we’re in the right place before we start easing our policy, because the most important thing right now is to get our price stability measure as close to target as possible.”

Q. What does it take for a pause in rate increases?

Bostic: “If inflation approaches target faster than I expect, that tells me that we are getting closer to a point where stopping and letting our tightening stance do its thing would be more appropriate. I don’t think we’re there right now.”

“I have discussed this with many of my colleagues. We understand what data dependency means and will try to avoid getting too locked into one approach. The world is complicated and that is why we have to be open to the possibility of new things happening that imply that our political position has to move to a different place”.

Q. After a break, would there be an option to resume the increases later?

Bostic: “Yes, I like optionality so I never want to rule out any action, but I think a lot of this will depend on how the economy performs relative to my expectations. And again, reliance on data would suggest that we shouldn’t just take a stand, stick our heads in the sand, and never pay attention to what’s going on or never respond to it. So I think it would be dangerous for people to think that we are 100% committed to any trajectory going forward.”

“I have spoken to many of my colleagues about this. We understand what data dependency means and we will try to avoid getting too locked into one approach. The world is complicated and therefore we need to be open to the possibility of new things happening that would mean our political stance needs to be moved to a different place.”

Q. Is a soft landing for the US economy more likely now?

Bostic: “I don’t usually do odds. What I will say is that I have long said that I believed the economy had a lot of momentum and there was a good chance that momentum would be enough to absorb our policy tightening in a way that would help us avoid a recession. I still think so, and I think the jobs number we just saw on Friday suggests there’s still considerable momentum.”

“If we can keep that momentum going and at the same time see some downward pressure on prices—we’re not seeing wages go up significantly, maybe we’ll see more people coming back into the workforce to get the supply going.” become more of a contributor to this reduction in imbalance—then I think it’s quite possible that we can avoid a contraction and that’s been more or less what my expectation has been and I’m hopeful that’s what’s going to happen. will come true.”