Raphael Bostic, president of the Federal Reserve Bank of Atlanta, joined Yahoo Finance to discuss his outlook on inflation and how the central bank may respond.
Below is a transcript of his appearance, aired live on Jan. 31.
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BRIAN CHEUNG: Thanks so much, Alexis. Obviously a lot of attention paid to the Federal Reserve with regards to the possible policy tightening over the course of 2022. So let’s talk about this a little bit more with one of those key policymakers: Atlanta Fed President Raphael Bostic joining us of course from Atlanta. President Bostic, Happy Monday to you.
RAPHAEL BOSTIC: Happy Monday to you too, Brian. It’s good to see you.
BRIAN CHEUNG: Great to see you too. So let’s get right into it. Over the weekend, you made some remarks to another news outlet talking about the idea of the possibility of a 50 basis point hike from the Fed. I guess I’m just wondering if you could kind of very quickly elaborate on whether or not you meant that’s your preferred policy setting for the next meeting in mid March.
RAPHAEL BOSTIC: Let me just say first of all, that’s not my preferred setting, policy action for the next meeting. When I started looking at this year, I had three three moves or three rate increases in mind. And March increasingly was looking like it’s the right time to do that. But the other thing that I’ve been very mindful of, is that the economy has been a surprise to us and a surprise to the upside repeatedly in ways that have left me really just observing how the world works, and keeping my options open so I can adapt my policy to what the world tells me is happening. So I just think it’s really important for people to know that we’re not set — or I’m not set — on any particular set progression in terms of policy. I’m going to let the data and the evidence really guide us in terms of what an appropriate action might be.
BRIAN CHEUNG: And thematically, that kind of fits with the nimbleness that the Fed chairman was talking about in the press conference last week. But at the same time, you have market watchers that are trying to figure out how many rate hikes we should expect over the course of 2022. And it seems like now the prevailing expectation is for five rate hikes over the course of this year. And some, we had Ethan Harrison Bank of America on earlier, saying possibly seven this year. Do markets have it right?
RAPHAEL BOSTIC: Well, you know, a lot’s gonna happen over the course of the year. Right now, in my estimate, I’ve got three. But there’s a lot of data that’s going to come in and I’m assuming that those other forecasts have thoughts about what’s going to happen in terms of inflation, and what’s going to happen in terms of job growth. And that’s going to inform how policy plays out. Well, for me right now, I’m just staying laser focused on the next meeting, and trying to see what the data is telling us about the trajectory of inflation for this first quarter of 2022. And what impact that’s having on jobs and unemployment. That’ll tell me what’s going to happen for the next meeting and give me a hint for the one after that. You know what the long arc looks like? I think it’s really hard to lean in too much on that at this stage.
BRIAN CHEUNG: So let’s talk about optionality because the Fed Chairman used the word steadily and you have Fed watchers obsessing over the difference between steadily and gradual, but I spoke with your colleague in Minneapolis last Friday, who said he could see the case for perhaps, you know, raising interest rates and then taking a pause after that to assess where things go. I mean, I guess all this depends on how much of a hawk you might be. I know you’re an avid birdwatcher, so would you describe yourself as like a Peregrine Falcon Hawk here or more of like a Red-Tailed hawk here. How would you describe what you would like to see over the course of this year?
RAPHAEL BOSTIC: I think of myself as more of an owl than a hawk. What I would say is look, the goal here is to move us off of our emergency policy stance of maximum accommodation. And also try to push back on this inflation that has really elevated to levels that we haven’t seen for quite some time. And how that plays out and the exact path of that? That’s something that the committee is going to sort of work on. What I will tell you is that I’m at three [rate hikes]. When I started thinking about 2022, I was at one [rate hike], and that was going to be in the summer, as the economy’s come back stronger than I expected and inflation has gone up faster and more persistently than I expected. I’ve increased the number of moves I think is appropriate, and I pulled them forward. So for me, I think we’re going to need to be thinking very carefully about sort of how things are going. Watch how the economy responds to our first move — to make a decision that gives us information about what should happen in the next meeting in the meeting after that. I think the message of the chair was trying to say — trying to offer, and that I would say as well, is: we’re not set on any particular trajectory. The data will tell us what’s happening. And once the data come in, I think our decision for each meeting for the rest of this year will be clear.
BRIAN CHEUNG: An owl, I like that I’m writing that down. Let’s just switch to your overall outlook on inflation. You know, obviously, as the Fed starts to tighten policy, the idea is hopefully that we’ll get inflation down later this year. What do you expect or when do you expect to see some of these eye popping numbers start to come down?
RAPHAEL BOSTIC: Well, I would say for me for this year, I penciled in a 3% inflation for the entire year. But we’re gonna have to see what happens over the next several months. You know, we— I’m still seeing elevated housing prices. That’s going to really make it harder for the baseline numbers to fall in a dramatic way through the course of this year. All that said, I’m hoping that we’re going to start to see supply chains ease as some of the labor market tensions and shortages kind of relieve themselves as we get further on into the year. So I’m hopeful that by the end of the year, we will see a significant drop in inflation. What I’m really hoping for right now though — I’m just going to say that we’ve been seeing month over month inflation levels somewhere in the half a percentage point area. I’m hoping that by the late spring or early summer, we can get that down to month to month changes in a quarter percent range. If we can do that, I think that I won’t have to adjust my policy, viewpoints or forecasts in any particular l significant way.
BRIAN CHEUNG: It seems like directionally, the worry is that inflation will not come down faster than expected. That’s because of the raising expectations. We’ve heard from you and your colleagues. But I guess on the other side of the coin, what happens if inflationary numbers actually come down faster than you expect? What would the policy implications be in that case?
RAPHAEL BOSTIC: I’m glad you asked that question, because the data can go in one direction or the other direction. And I would expect that for me, I would adjust my policy to maybe not be as aggressive in terms of raising interest rates if it comes in and inflation responds very, very quickly. That’s not what I’m expecting, because when I talk to business leaders, what they’re telling me is a big got some things priced in for the first half of this year, but they’re pretty sure they’re still going to work out and put into place. So I’m not expecting inflation that’s going to come far, far below what I’m hoping will happen in the first half of the year. But if that happens, I think that’d be good news for all of us and it would give us some time to pause and see sort of how other parts of the economy are working.
BRIAN CHEUNG: All right, well inflation obviously part of the price stability mandate, but want to explore the labor market side of the mandate with the Fed also trying to prioritize maximum employment here. But we’re gonna take a quick two and a half minute break. We’ll have more conversation with the Atlanta Fed President Raphael Bostic on the other side of this quick break, we’ll be right back.
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BRIAN CHEUNG: Welcome back to Yahoo Finance Live. Again, we’re joined here on the program by Atlanta Fed President Raphael Bostic for a conversation on Fed policy. President Bostic, we were talking about inflation before the commercial break. But now I want to shift over to the labor market. We are expecting a new print on the employment situation this week. What are you expecting out of that report?
RAPHAEL BOSTIC: I’m expecting that number to probably come in lower than what we’ve seen for the last several months because the impact of Omicron has been real. And it has created some tensions in terms of employers’ ability to fill the positions. And I think that’s going to reflect itself in this number. I would say though, that is not my expectation that that impact of Omicron is going to really last and persist for some time. And I’m hopeful that we’re going to see a rebound in labor markets in the February and March reports. And that would be very consistent with what I’ve expected. The other thing I would just say in terms of labor markets in general: the rebound in labor markets has been incredibly strong by historical standards. And that should be very encouraging. And everything that I’ve heard from the contacts that I talked to across the sixth district are that they are still expecting strong hiring, a robust labor force growth through at least the first half of the year. I think there’s a lot of momentum that will be positive, and that will sustain.
BRIAN CHEUNG: So let’s talk about the risk of Fed hiking. I mean, is there a risk that as you do this, they could actually raise unemployment in the process. Because I think [the unemployment rate] ticked down to 3.9%, which was below any projection that either you or your colleagues on the FOMC had had in the December projections.
RAPHAEL BOSTIC: I’m not really worried about that too much at this point. From what I’ve heard, the constraint on labor and hiring is really on the supply side. And when you think about the supply, the thing I try to tell people all the time is: we are still in a pandemic economy. And so there are many people who are on the sidelines for virus-related reasons, either because the childcare centers are no longer there. There’s uncertainty about schools or senior care. And we still have a number of people who have just decided to retire — more than a million people have that, and they’re not sure whether they’re going to return or not. And so a lot of that’s going to sort itself out independent of our policy. And to me, I’m expecting as we get more clarity with the virus, more normalcy in terms of people being used to living with it. We’re gonna see a number of these people who have not returned to the labor force come back in. And I think that’ll keep some momentum in terms of job creation through the economy.
BRIAN CHEUNG: So let’s shift gears. We had talked a lot about interest rate policy at the beginning of this interview, but obviously the balance sheet is also a big part of that. Your colleague in Kansas City, Esther George, speaking earlier today about the importance of those two things working together. The Fed began the process of talking about laying out these principles for how the Fed might eventually allow its nearly $9 trillion in holdings to actually decrease. How would you like to see that process unfold and do you have a preferred time for when you would like to see that process begin?
RAPHAEL BOSTIC: In terms of your second question, let’s get a few of our interest rate moves in order to see how the economy is responding. And after we’ve moved away from zero, I think it will be time for us to start reducing the size of the balance sheet. We increased the balance sheet far more dramatically than we did in any of the previous rounds, because the crisis that we’re facing was more significant. As fast as we increased it. I think we should be thinking about decreasing it faster than we have in the past. The economy is stronger. And we have that previous experience that gives us some guidance as to how markets are likely to respond as that balance sheet shrinks. So I think we can be more robust in terms of how we do that. And trying to get that underway as soon as possible would be my preference. Of course, we’re going to see what the data say as interest rates start to move. But if the economy appears to still be strong and have some momentum, I’d say, let’s get that balance sheet to start to shrink and get back to a more normalized level.
BRIAN CHEUNG: Is there any interaction between the balance sheet and what you plan on doing with the balance sheet on long-end rates? Because there’s been some chatter about some doubt in the yield curve about the ability of the Federal Reserve to raise interest rates without inverting it or perhaps inducing the next recession? Are you gleaning anything from the fact that spreads between the two and the 10-year [U.S. Treasuries] have narrowed considerably over the past few months?
RAPHAEL BOSTIC: They have narrowed. I think partially, because there’s still a lot of uncertainty about how things are going to pay out over the next several months. Look, we have, in our balance sheet, the ability to affect the longer the rates at the longer end of the yield curve. And it will be my desire to see that we make sure that the interaction between interest rates and our balance sheet moves occurs in a way that does not accelerate the flattening of the yield curve, but rather gets into a much more normalized trajectory. We are where we have been for the last two years and really an unprecedented space. And as we go back to a more normalized policy posture, and society gets used to living into a new equilibrium with the virus, my hope is that all of the policies returning to where they were, will get the yield curve to look the way it has historically as well.
BRIAN CHEUNG: Well, I guess the concern here, though, is that people are worried that the next economic downturn that we’ll experience will be Fed-induced. So I guess do you have any concerns that the Fed could tighten — just broadly interest rates and balance sheet policy — [and] actually tilt us into the next downturn?
RAPHAEL BOSTIC: I’m always concerned about that. So as a general matter, that’s something that I do worry about. But I do think that as we look at the economy and the situation that we have right now, the economy is far stronger than it has been, during any of my time in this role, and certainly, during any of the recoveries that we’ve been trying to navigate our policy through in recent memory. So I think, for me, the risk that our policies are going to lead to a contraction in the economy, I think they’re relatively far off. But as I said at the very beginning, my job for the next several months is going to be to really observe the data. Scour it carefully. Go and leverage my team that is out talking to business executives on a day to day basis about what they’re seeing and what the tensions are. And then discerning whether the risk [of] that contraction is coming up. I will say, I’m not hearing that from any of my contacts right now. And I don’t think the data is saying that in any way. So for now, that’s not forefront of my mind. But I’m a central banker, and central bankers get paid to worry. So something I’ll be looking at, and taking stock of over the next several months.
BRIAN CHEUNG: And last question here. Down in DC, there are three candidates for Fed governor spots that we’ll be getting a hearing in the Senate Banking Committee, and it’s important because there could be the first Black woman to ever serve as a Fed governor in the central banks over 100 year history. As the first Black president to head a regional Reserve Bank, are there any views that you can share about diversity within the functions of the central bank?
RAPHAEL BOSTIC: I will just tell you — for me, diversity has, really throughout my career, helped my work be better. By having my ideas and my thoughts get challenged by people from different viewpoints and different lived experiences. Or at least have different considerations in terms of what appropriate way to characterize a problem is and what possible solutions might look like. So I just think, in my experience, I would expect this new diversity — to the extent that that the three candidates do get confirmed — will lead to some different types of conversations and potentially some very, very interesting deliberations about how policy should move forward. And whose factors or whose lifestyles or experiences we might be overweighting or underweighing. I think there’s a lot of potential there for very interesting conversations.
BRIAN CHEUNG: Right, Atlanta Fed President Raphael Bostic, the self proclaimed owl of the FOMC. Thanks so much for joining us on Yahoo Finance this afternoon.
RAPHAEL BOSTIC: Very good to see you Brian.
