Fed's Bostic: Gradual Rate Rises Appropriate Over Next Several Years -- Update

By Michael S. DerbyFeaturesDow Jones Newswires

MONTGOMERY, Ala. -- Federal Reserve Bank of Atlanta President Raphael Bostic said Tuesday the central bank should press forward with interest-rate rises, and he reiterated his inclination to support an increase in December.

"I think it will be appropriate for interest rates to rise gradually over the next couple of years, as our policy position is still very accommodating rather than neutral," Mr. Bostic said in a speech here. "How gradual that pace will be depends on the strength of the incoming macroeconomic data and what it implies for the economic outlook."

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When it comes to his support for boosting the Fed's interest rate target in December, Mr. Bostic said after his speech that "I'm still in that place." Asked if a rate rise is on the table, he responded "yes." Mr. Bostic explained, "I'm going to stay open, but right now I'm pretty comfortable with the notion of us continuing to go on our pace toward a more balanced monetary policy."

Mr. Bostic isn't currently a voting member of the rate-setting Federal Open Market Committee. It next meets in mid-December in a gathering that is widely expected to result in a quarter-percentage-point increase in what is now a 1% to 1.25% overnight target rate range. If the Fed follows through, it would be the third increase of the year.

In his speech, Mr. Bostic said he believes the outlooks on growth and hiring support a move higher in interest rates but, like many, he notes weak price pressures relative to the Fed's 2% inflation target complicate that outlook.

"All of this anecdotal information convinces me that a reasonable economic forecast for the foreseeable future is more of the same: GDP growth continuing a bit above 2%, the unemployment rate in the low 4s, and modest increases in real wage growth," Mr. Bostic said.

The official observed there's some evidence employers are going beyond wage increases to attract workers, like offering more flexibility and other nonmonetary benefits to make a job attractive.

The official said the economy is near full employment and has withstood the impact of the recent hurricanes. He said he doesn't expect to see the economy surge, and added that possible tax law changes "could be one of the needle-movers on economic activity."

Mr. Bostic noted that inflation has "softened" over the course of this year.

"While I'm still holding to the view that the recent weakness largely reflects idiosyncratic noise, I'll be watching the next few inflation reports closely for signs of a pickup," he said.

Fed officials like Minneapolis Fed leader Neel Kashkari have warned that it is a big mistake to raise rates when inflation is so far short of the central bank's 2% target. But other Fed officials, such as Philadelphia Fed leader Patrick Harker, have said they are still leaning toward a December rate rise, and others have made the case rates need to rise before the Fed hits its target so as not to allow the economy to overheat, which could force a more aggressive course of increases.

In his comments to reporters, Mr. Bostic said that leadership changes at the top of the Fed, which will bring a new chairman next year and possibly a number of new bank governors, is unlikely to change the monetary policy outlook much.

"There's uncertainty because the actual people matter. But at the same time we are an institution that's been consistently and historically very evidence-based," he said. "I wouldn't expect radical departures from policy but I don't know who will be nominated, so there's still some up-in-the-air aspect to it."

In remarks to the audience, Mr. Bostic explained that he's not fully convinced that the bond market's yield curve, as measured by the difference between short- and long-term borrowing costs, predicts how the economy will perform in a world where there's high international demand for U.S. securities.

Many believe a negative yield curve, where long-term yields are below short-term yields, signals an economic downturn. The narrowing of these spreads has caused some concern.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

November 14, 2017 15:50 ET (20:50 GMT)