Fed governor is open to another large rate cut—under one condition
Atlanta Federal Reserve Bank President Raphael Bostic says he’s willing to back another jumbo-sized rate cut—but only if the U.S. job market weakens further.
In an interview with Reuters, Bostic said “a surprise to the weak side” on employment “would pull me much further into really needing a dramatic move.”
Bostic, who sits on this year’s Federal Open Market Committee (FOMC), said the tell-tale sign of whether another large cut is warranted is if the economy adds fewer than 100,000 jobs in September.
“I will be watching upcoming jobs data closely,” said Bostic. “If employment growth slows much below 100,000 jobs, it would warrant closer questioning of what is happening.”
The Bureau of Labor Statistics is scheduled to release the September nonfarm payrolls report on Oct. 5.
Central bankers cut interest rates by 0.5% on Sept. 18—marking the first such move since 2007. As Creditnews reported, 2007 was also a recession year, leading pundits to speculate whether the economy was already in a downturn.
FOMC members, including Bostic, have downplayed the recession fear, but have acknowledged that the economy was in a cooling phase.
Markets seem to be taking Bostic at his word by penciling in a strong probability of a large rate cut.
According to CME Group’s FedWatch Tool, the likelihood of another 0.5% rate reduction was near 35% on Monday. It was as high as 53% last week.
Although the job market is slowing, other economic indicators suggest Bostic and the FOMC may have room to be patient in cutting rates.
Patience is a “luxury”
During the interview, Bostic acknowledged the favorable progress on inflation.
According to the Bureau of Economic Analysis, the Fed’s preferred measure of inflation—the personal consumption expenditures (PCE) index—fell to a 2.2% annual rate in August.
This puts inflation within striking distance of the central bank’s 2% target.
The more restrictive core PCE index, which excludes food and energy prices, rose slightly from July and was up 2.7% on a year over year basis.
“If the story is that inflation is continuing its drop and the labor market is staying strong, I think we have the luxury of being a bit more patient” with cutting rates, said Bostic.
Despite the apparent progress, not every inflation category is cooperating. Housing-related expenses increased by 0.5% on the month, marking the largest jump since January.
As Creditnews reported, the inflation data has masked a continued surge in housing costs throughout the country.
The shelter component of the Consumer Price Index (CPI) has been rising more than 5% annually for 29 consecutive months. It was 5.2% in August, which was more than double the headline CPI.
This trend led Morningstar senior U.S. economist Preston Caldwell to conclude that “Housing is the sole remaining driver of our inflation worries.”