Fed official says keeping rates elevated could ‘inflict unnecessary pain’
Atlanta Federal Reserve Bank President Raphael Bostic believes keeping interest rates high for too long could be disastrous for the economy.
In a quarterly essay published by the Atlanta Fed Bank, Bostic said, “We must not maintain a restrictive policy stance for too long.”
Specifically, policymakers can’t wait for inflation to fall back to the central bank’s 2% target before they begin cutting interest rates. Doing so “would risk labor market disruptions that could inflict unnecessary pain and suffering,” said Bostic.
Labor market disruptions have been apparent in recent months as job growth slowed and unemployment rose to nearly three-year highs.
Bostic, who’s a voting member of this year’s Federal Open Market Committee (FOMC), acknowledged that hiring trends had weakened but said the labor market “is not weak.”
The Atlanta Fed president also said he’s confident that inflation is on track to return to the central bank’s target. He stressed that the core Personal Consumption Expenditures (PCE) index is the key metric he’s tracking.
According to the Department of Commerce, the core PCE index rose by 0.2% in July and 2.6% year over year. The 12-month figure was slightly lower than economists’ forecasts of 2.7%.
The data was the latest in a series of reports pointing to softer inflation throughout the economy. For the central bank, it was a green light to begin cutting interest rates at the Sept. 17-18 policy meeting.
The Fed is in a good spot, economist says
Although several economists have warned about a potential recession disrupting the Fed’s plans for a soft landing, Joseph Brusuelas believes the central bank is in a much better position than previous rate-cutting cycles.
The RSM chief economist said recent economic data “points to the re-establishment of price stability across the American economy.”
He further explained that the U.S. is “poised to grow at or above the long-term 1.8% rate as the Fed begins its rate-cutting campaign, which should put a floor under growth and hiring.”
The recent data “supports risk-taking by the commercial sector as rates come down and by investors, who are now looking at a sustained increase in the economic expansion,” he said.
Brusuelas’ optimism is boosted by the government’s recent revision to second-quarter GDP figures. According to the Department of Commerce, the economy expanded at a 3% annual rate in the second quarter, higher than the 2.8% reported previously.
A separate report from the Institute for Supply Management (ISM) showed that the U.S. services sector continued to rebound in August. ISM’s services purchasing managers index improved to 51.5% from 51.4% the previous month. Anything above 50 signals expansion in economic activity.
Against this backdrop, Fed Chair Jerome Powell has expressed confidence that lowering interest rates will create a buffer against any potential recession.
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