Atlanta Fed President Bostic Cautions Against Hasty Rate Cuts Amid a Prosperous Economy

Atlanta Fed President Raphael Bostic emphasised that the U.S. Federal Reserve is not under urgent pressure to cut interest rates, citing a "prosperous" economy and job market. Bostic acknowledged the risk of inflation remaining above the central bank's 2% target or further fueled by "pent-up exuberance."

While Bostic still sees the possibility of two quarter-point rate cuts by the end of the year, he stressed the importance of ensuring that the current economic strength does not lead to excessive inflation. He expressed the need to observe more progress before gaining confidence in inflation, which averages 2% over time.

Bostic acknowledged that the labour market and the economy are performing well, providing the Federal Open Market Committee with the flexibility to shape policy without an immediate sense of urgency. However, he highlighted the fine line the Fed is navigating to avoid economic "froth" and inflation.

In a new essay and comments to reporters, Bostic noted the growing stress among certain consumers, particularly those with lower incomes, due to high inflation and tight credit. He also expressed concerns about a potential surge in demand that could counter price progress.

Bostic emphasised that the Fed has some time to ensure a steady path towards the 2% inflation target, as there is no sign of degradation in the job market. He cautioned against expecting back-to-back rate cuts once the easing cycle begins, emphasising that the pace will depend on market participants, business leaders, and families' responses.

The Federal Reserve's meeting on March 19-20 is expected to maintain the benchmark interest rate in the 5.25% to 5.5% range, with updated projections on potential rate cuts later in the year.

Bostic acknowledged that while a slow return to the Fed's inflation target without harming the job market or growth would be a "resounding success," it is premature to claim victory in the fight against inflation. He expressed concern about certain items experiencing more than a 5% annual price increase and an underlying inflation measure just outside the central bank's target.

The Atlanta Fed President highlighted discussions with business executives who indicated being on pause but ready to deploy assets and ramp up hiring when appropriate. Bostic warned of the potential for "pent-up exuberance" to unleash a burst of new demand, posing a new upside risk that requires scrutiny in the coming months.