EXCLUSIVE: Fed Bostik says the idea of ​​stopping in September is not linked to any imminent market rescue

Atlanta Fed President Rafael Bostic said in an exclusive interview with MarketWatch that his suggestion that the central bank would pause in September in its drive to raise interest rates should not in any way be construed as a “Fed mode,” or the belief that The central bank will come to the rescue of the markets.

In an interview on Tuesday, Bostick said the idea of ​​any kind of “Federal Reserve Mode” was never a factor in his thinking.

“I think it’s a good anecdote on some level for the storybooks, but it doesn’t get me thinking about politics,” he said.

Financial market conditions have tightened sharply this year as the Federal Reserve began raising its benchmark interest rate in the face of the highest inflation readings in 40 years. Dow Jones Industrial Average DJIA,
It’s down 9% this year while the S&P 500 SPX is down,
13% are off year-to-date. The 10-year Treasury yield is TMUBMUSD10Y,
Go below 3%.

Most Fed officials would prefer the Fed to raise interest rates by half a percentage point at the central bank’s next two policy meetings in June and July.

last week, Bostick suggested that pause in September It might make sense, causing some bullishness in the markets.

Bostick said a pause might be a good idea because the market response to the Fed’s shift to raising rates “has been much stronger than what we’ve seen historically.”

He said this increases the possibility that the broader economy will respond quickly to the Fed’s rate hike as well.

“I want to make sure I really understand the pace of change associated with our policy response,” Bostick said.

By September, some of the uncertainty about the economy could be resolved and labor market imbalances could recede, leading to “a very significant drop in inflation,” he said.

The other side of the coin is that inflation may remain higher as supply chains remain disrupted by external events such as the war in Ukraine and the COVID lockdowns in China.

The president of the Atlanta Federal Reserve said he wants to see the central bank move the benchmark interest rate to the 2%-2.5% range sometime towards the end of the year.

At this point, if inflation does not move down in a significant way, Bostik said he would be “entirely comfortable” moving higher rates into a range that would limit economic growth.

The goal is to reduce inflation. We have to really approach it in a deliberate and persistent way.” “I want to be open to both possibilities.”

After the expected rate hike in June and July, the Fed rate will be in the range of 1.75%-2%.

on Monday, Christopher Waller, the Federal Reserve Governor, pushed back on the idea of ​​stopping in September, saying he would prefer to raise rates by half a point at the upcoming “many meetings”.

Street. Federal Reserve Chairman Lewis James Bullard He said he wants the Fed to raise interest rates to 3.5% by the end of the year.

For his part, Federal Reserve Chairman Jerome Powell said he wants to raise interest rates until there is “clear and convincing evidence that inflation pressures are easing and inflation is declining.”

Powell met President Joe Biden at the White House on Tuesday. Analysts said the public meeting The Fed’s hand strengthened to fight inflation.

Investors in financial futures markets believe that the Fed will raise interest rates to 3% by the end of the year and then stop.

Bostick said he had expected inflation, as measured by the PCE, to slow to just over 4% the annual rate by the end of the year, from 6.3% in April.

Minutes of the last Fed meeting show that Fed staff expect PCE inflation to slow to 4.3% by the end of this year.

Bostick said some of his contacts are reporting the “first signs” of slowing demand, which could affect the eventual level of the Federal Reserve’s benchmark rate needed to control inflation.

Although no deflation has occurred yet, there is “less willingness to spend freely among certain segments of the population,” Bostick said.

Right now, he said, the downturn in spending is centered on families with less wealth and savings heading toward the pandemic. While there is generally a lot of aggregate savings in the economy, the distribution is divided in such a way that wealthier households have more savings and can withstand higher inflation.

“As we go further and further, the number of families living in this situation will go down, which is why you might see some reductions,” he said.

Bostick said there is “a lot of momentum in the economy.”

“The economy could slow down for some time before it slips into more recession,” he said. “I understand the concern. I don’t think we’re quite there yet.”

Bostic is not a voting member of the Federal Reserve’s interest rate committee this year. The Federal Reserve’s Policy Committee will meet on June 14-15.

Federal Reserve officials will stop discussing policy after Friday, June 3, to prepare for meetings.

Bostick, an expert on housing markets from previous work at the Department of Housing and Urban Development, said he expects Housing markets to cool Because of high mortgage rates.

He said this cooling in “many markets” “will not translate into outright price cuts”. He said that the performance will depend on the economic performance of the domestic market, not the overall phenomenon that has become the norm.

On Wednesday, the Federal Reserve will launch its “quantitative tightening” program to shrink its $9 trillion balance sheet, initially by $47.5 billion per month and then $95 billion per month starting in September. That’s just over a trillion dollars in cuts each year. Experts generally expect the Federal Reserve to reduce its asset holdings by about $3 trillion.

Bostick admitted there was Some uncertainty in the markets related to the impact of quantitative tightening And the Fed will make sure it understands how the markets are responding.

“We’ll go our way steadily,” Bostick said.