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Fed’s Bostic Confident Economy Can Handle Another Jumbo Rate Hike

·3 min read
Fed’s Bostic Confident Economy Can Handle Another Jumbo Rate Hike

(Bloomberg) -- Federal Reserve Bank of Atlanta President Raphael Bostic said the US economy can cope with higher interest rates and repeated his support for another jumbo move when the central bank meets later this month.

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“Right now I’m pretty comfortable,” he told reporters in a conference call Monday. “I’m confident that the economy will be able to withstand this next move. I would support a 75 basis-point” increase.

Policy makers pivoted to aggressively lifting interest rates this year as they work to tame the hottest inflation in four decades, a shift they acknowledge could slow US economic growth and weaken the labor market.

Bostic, who does not vote on policy this year, said last week that he is “fully supportive” of raising rates by 75 basis points later this month. The policy maker said on Monday that he thinks it is possible for the Fed to raise interest rate to about 3%, a level that he considers “neutral,” without sparking a recession.

While financial markets have gyrated as investors fret the Fed will cause a recession, recent data show the economy still has some things going for it: US employers added 372,000 jobs in June and the unemployment rate remained near a 50-year low, confirming that the labor market is still tight.

Fed officials will have a fresh inflation reading to consider on Wednesday, when the Labor Department releases the Consumer Price Index for last month. Economists forecast that consumer prices increased by 8.8% in June from a year earlier, above the 8.6% increase seen in May.

While a majority of the 18 officials on the policy-setting Federal Open Market Committee have declared themselves open to raising rates by 75 basis points in July, following a move of that size last month, at least one is worried about going too quickly.

Kansas City Fed President Esther George, who dissented last month in favor of a 50 basis-point increase, cautioned earlier on Monday that rushing to tighten policy could backfire.

“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets,” she told the Mid-America Labor/Management Conference in Lake Ozark, Missouri.

Gaining Traction

Bostic said the Fed’s moves are starting to put downward pressure on demand, and said there are some signs that supply constraints are easing. However, the invasion of Ukraine and other forces are pushing inflation up. He said he is watching for signs that monthly inflation changes are falling and will monitor how broad based price increases are.

The Atlanta Fed chief said the central bank can be “methodical” as it raises rates to remove the support it provided during the pandemic.

Asked what it would take for him to support a rate hike larger than 75 basis points, such as a full percentage point, Bostic said he would consider being more aggressive if data suggested that inflation is moving further away from the Fed’s 2% target or that longer-run inflation expectations were rising, but he doesn’t expect it will be necessary.

“I do think the evidence that we’ve seen in the last few days suggests that those scenarios are not playing out, so I’m not expecting that we’ll have to do that,” Bostic said. “But I try to keep my mind as open as possible to any possibility.”

Investors fully expect the US central bank to raise rates by 75 basis points again when officials meet on July 26-27, fund futures show.

(Updates with comment from Bostic in fourth paragraph.)

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