© Reuters. FILE PHOTO: The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo
By Howard Schneider
WASHINGTON (Reuters) -The U.S. central bank can begin reducing interest rates “sometime in the third quarter” of 2024 if inflation falls as expected, Atlanta Federal Reserve President Raphael Bostic said on Friday, pushing back against expectations of an imminent move but outlining a deliberative process that will gather steam in coming weeks.
Bostic said he expects inflation, as measured by the personal consumption expenditures (PCE) price index, to end 2024 at around 2.4%, enough progress towards the U.S. central bank’s 2% target to warrant two quarter-percentage-point rate cuts over the second half of next year.
“I’m not really feeling that this is an imminent thing,” Bostic said in an interview with Reuters, with policymakers still needing “several months” to accumulate enough data and confidence that inflation will continue to fall before moving away from the policy rate’s current 5.25%-5.50% range.
But Bostic also said he has asked his staff to begin discussing principles and thresholds to help frame the debate.
“We’ve got to figure out definitionally what the ‘neighborhood’ looks like” where the inflation outlook is such that rate cuts are warranted, Bostic said. “Over the next several weeks … I think we are going to start talking about that.”
Bostic’s remarks put detail around a policy shift that the Fed began at its policy meeting this week, when officials agreed that, absent another inflation shock, the current policy rate is high enough to curb the price pressures they have been battling for two years.
Investors have run with the comparatively dovish tone that Fed Chair Jerome Powell struck at a press conference after the end of the meeting on Wednesday, pushing down market-based interest rates and increasing bets the central bank will begin to reduce interest rates at its meeting in March.
The comments from Bostic, a voting member of the central bank’s policy-setting Federal Open Market Committee (FOMC) next year, are potentially telling in that regard. He was ready to stop raising rates earlier than his colleagues, saying as of this past June that he felt monetary policy was already restrictive enough – before the FOMC raised the policy rate by another quarter of a percentage point at its July meeting.
Bostic also said that inflation has fallen faster than he anticipated since then, despite continued growth in an economy he feels will skirt any appreciable rise in the unemployment rate, delivering the “soft landing” hoped for by the Fed.
But just as he was cautious about raising rates too far, Bostic said he will be cautious about cutting them too soon. He said he wants to be sure inflation is fully contained before lowering rates, and avoid being “surprised.” Indeed, his outlook for two 25-basis-point rate cuts is less than the three or more seen by many of his colleagues.
“We’ve been getting close to the neighborhood,” Bostic said, adding that he regarded the three- and six-month measures of inflation as “useful markers” for the discussion. Those measures currently stand at around 2.5% for the PCE price index excluding food and energy items, considered by many officials as an important guide to underlying inflation.
But “I am going to try not to presuppose anything at this point,” he said. “We’ve been surprised throughout the pandemic on a number of fronts, some to the good and some to the bad. And so I just don’t want to get anchored too much.”