JimVallee
Atlanta Fed President Raphael Bostic said Wednesday that he expects the federal funds rate will need to reach between 5% and 5.25% as stay there “well into 2024” in order to bring inflation under control.
“This will allow tighter policy to filter through the economy and ultimately bring aggregate supply and aggregate demand into better balance and thus lower inflation,” he said.
Part of the reason why inflation has been so stubborn is the tight labor market. The difference between the demand for workers and the supply of labor has remained above 4M for a year, he pointed out.
“That is a dramatic shift from the conditions that prevailed before the pandemic. For roughly a year-and-a-half before February 2020, labor demand exceeded labor supply, but only by about one million,” Bostic said. “For the previous 40 years, labor supply was consistently higher than labor demand.”
So far higher interest rates hasn’t yet resulted in significantly lower demand across the wider economy, he said. While housing and commercial real estate markets have slowed, consumer spending has remained strong.
“In addition to seeing progress in rebalancing the labor market, I’d need to see tighter money more significantly slow aggregate demand before I’d consider shifting policy,” Bostic said.
He doesn’t consider it a foregone conclusion that the higher rates will lead to a severe recession. “I continue to believe that the economy packs sufficient momentum to weather higher interest rates, which will ultimately bring inflation down to our objective, without a major downturn,” he said, adding that his base case sees mile job losses compared with previous economic slowdowns.
Last week, Cleveland Fed President Loretta Mester said she expects the fed funds rate will have to push “somewhat above” 5%.