Atlanta Fed President Rapahel Bostic said Monday there was a significant risk that the Fed’s interest rate cuts could reignite inflation.
in an essay Posted on the Atlanta Fed websiteBostic said the Fed should take a cautious approach to the economy, recognizing that the risk of higher inflation remains and that easing monetary policy could fan the flames of rising prices. insisted.
In particular, Bostic warned that a premature rate cut could cause a surge in business activity, boosting demand and pushing up inflation.
“I asked a group of business leaders if they were prepared to jump at the first sign of a rate cut,” Bostic said. “The answer was a resounding ‘yes’.”
Fed officials have been predicting a rate cut since the beginning of the year at some point in 2024. Fed officials’ forecasts released after their December meeting showed a median expectation of three rate cuts. Markets had initially expected further rate cuts, but have recently lowered their expectations to come closer to the Fed’s December outlook.
But that prediction may now be outdated. Data available since the December meeting shows economic growth remains stronger than expected, inflation has not fallen further in recent months and the job market remains strong.
There was no latest information in January because the Fed releases its officials’ forecasts after every other meeting. However, the Fed left interest rates unchanged at its January meeting and signaled at its March meeting that it did not expect any rate cuts. Markets had initially priced in a near certainty of a rate cut at the May meeting, but implied odds in the swap market have now reduced the probability of easing to just 20%.
Even the idea of a June rate cut is now in doubt, with swaps markets pricing in about a 65% chance. There is an 85% chance that the amount will be reduced by July.
Some analysts have recently shifted their view that the Fed may not cut rates at all this year. Apollo Management’s Torsten Slok said in a memo last week that he does not expect any layoffs. Jim Bianco of Bianco Research has been insisting for months that the Fed would not cut interest rates.
Bostic said on Monday that if companies respond to interest rate cuts by announcing new jobs or expansion plans, that could undermine progress in curbing inflation.
“If that scenario were to play out on a large scale, there could be an explosion of new demand that could reverse progress towards rebalancing supply and demand. “There will be pressure. I think this threat, which I call ‘build-up euphoria,’ is a new upside risk that will require scrutiny in the coming months,” Bostic said. .
Much of Bostic’s essay focuses on the risks of higher inflation and the Fed cutting interest rates prematurely. But he said there is also a risk that the Fed could keep interest rates high for too long and push the economy into an unnecessary recession.
But he argues that if growth and the labor market are strong, the Fed can afford to wait.
“The good news is that the labor market and economy are thriving, giving the FOMC more leeway to set policy.
It’s the pressure of urgency,” Bostic said.
