U.S. inflation “appears to be easing” and that should allow the Federal Reserve to cut interest rates later this year, Atlanta Fed President Raphael Bostic said in a policy essay published Thursday.
After fearing that inflation was stagnating at a high level, Bostic said recent data indicate further progress, including that the share of goods and services growing at an annual rate above 5% has fallen below 20%, which is closer to the situation that prevailed before the COVID-19 virus pandemic and similar to the share observed when inflation was slowing rapidly last year.
“It’s going in the right direction,” Bostic said of a gauge he sees as one of the touchstones in the U.S. central bank’s fight against inflation, which hit a 40-year high in 2022.
Inflation remains “elevated,” according to the Fed’s latest monetary policy statement, with the personal consumption expenditures price index rising at an annual rate of 2.7% in April. The Fed’s inflation target is 2%, and little progress has been made in recent months.
PCE inflation data for May will be released on Friday.
Mr. Bostic said that as things stand, “I continue to think that conditions will likely require a cut in the federal funds rate in the fourth quarter of this year.” In later comments to reporters, he said one reason to be “patient” with the first cut is that it comes after inflation is on a clear path back to 2%, and can be viewed as the first in a series of cuts.
Investors expect the rate cuts to begin in September, with two quarter-percentage-point reductions by the end of the year, rather than the single rate cut that Mr. Bostic and many other Fed policymakers are now anticipating.
“I’m not attached to any particular policy,” Mr. Bostic said. “There are plausible scenarios where further reductions, no reductions or even an increase could be appropriate. I will be guided by the data and conditions on the ground.
Recent data on employment and economic growth point to “an orderly deceleration in activity that will restore the balance between supply and demand in the economy […]“It’s really economics 101.”
Businesses in his south-east constituency, he told a news conference following the publication of the essay, still see inflation as the “main concern”, with most believing current levels of hiring and employment are sustainable.
Mr. Bostic said he did not feel the jobs market was headed toward a “cliff” and that he believed the Fed could achieve its inflation target “with labor markets … that are tight by historical standards.” (Reporting by Howard Schneider; Writing by Paul Simao)
