Fed’s Bostic says large cut bolsters labor market, but pace not set

Federal Reserve Bank of Atlanta President Raphael Bostic said starting the central bank’s cutting cycle with a large move will help bring interest rates closer to neutral levels as the risks between inflation and employment become more balanced.

But officials should not commit to a cadence of outsize moves given uncertainty over where the so-called neutral rate is – where the Fed is neither stimulating nor slowing the economy – and out of concern that inflation could return, Bostic said.

“My residual concern about inflation might have led me to settle on a relatively small first move last week – say, 25 basis points. But such a move would belie growing uncertainty about the trajectory of the labor market,” Bostic said Monday in remarks prepared for a virtual event organized by the European Economics and Financial Centre.

Bostic’s comments come after Fed officials lowered interest rates last week by a half point, starting their rate-cutting cycle with a larger move than most economists expected. Chair Jerome Powell said the outsize cut is meant to bolster a labor market that is “in solid condition.” He said the move was also a sign of policymakers’ “commitment not to get behind” as the labor market weakens and inflation cools.

In his remarks on Monday, Bostic said the Fed had made “substantial progress” on inflation while risks to the employment mandate have grown.

The Atlanta Fed chief said he was encouraged by data showing inflation is falling faster than he expected. At 2.5%, the Fed’s preferred inflation gauge, the personal consumption expenditures price index, is close to the central bank’s 2% target.

Price increases are narrowing and core PCE, which excludes volatile food and energy costs, rose at an annualized rate of 1.7% for the three months through July, he said. Core services prices excluding housing are also cooling, Bostic said.

Bostic, who specialized in housing-related research and policy in much of his career before joining the Fed, called housing prices, which have been a stubborn source of inflationary pressure, “something of a mystery.”

On the employment side, he said the labor market is weakening as the unemployment rate rises, hiring slows and job openings come down from the peaks seen in 2022. But it is not weak, he said.

“The labor market is not yet flashing red for me,” Bostic added.

The more balanced risks call for a shift in monetary policy, and the larger move made sense given that interest rates are “a fair distance above” neutral, Bostic said.

“In my view, the 50-basis-point adjustment at the meeting last week positions us well should the risks to our mandates turn out to be less balanced than I am thinking,” he said.

Because policy is still restrictive, officials can slow or pause the pace of their rate cuts if inflation stalls, he said. And “any further evidence of material weakening in the labor market” would change his view on how aggressive policy adjustment needs to be in the future, he said.

Answering questions after his remarks, Bostic said Fed officials would monitor the labor market “strongly.” He also said he thinks there is still a “sizable share” of US households that have extra cash on hand, something that could support consumer demand in the coming months.

Projections released at the conclusion of the Fed’s two-day meeting last week showed a slim majority of officials favored cutting rates by an additional half-point over their two remaining sessions this year.

Bostic said earlier this month that the central bank’s two mandates – stable prices and maximum employment – had come into balance for the first time since 2021, but he was “not quite prepared” to declare victory over inflation.