(Bloomberg) — Federal Reserve Bank of Atlanta President Raphael Bostic said monetary policy has been less effective in slowing growth than in previous cycles, reinforcing the need to keep rates higher for longer to curb inflation.
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Speaking in a virtual discussion with students from the Stanford Graduate School of Business on Thursday, Bostic indicated he was pleased that inflation has resumed falling after making little headway in the January-to-March quarter, but noted progress is still slow.
“The first quarter of 2024, inflation basically went sideways,” the Atlanta Fed chief said. “The last couple of numbers suggest that maybe we have moved past that and inflation is continuing back on its path to 2%, but it is going slow.”
Bostic said people and businesses are less interest-rate sensitive than they might otherwise be because of how the economy has evolved through the pandemic.
“As inflation spiked and it became clear we were going to have to move our interest rate, our policy rate, anyone who had debt tried to lock in a low-cost debt,” Bostic said.
Because so much debt in the economy was refinanced to lower rates, the impact of the Fed’s main instrument of monetary policy is muted, he said.
“The sensitivity to our policy rate — the constraint and the degree of constraint that we’re going to put on is going to be a lot less.” For those reasons, Bostic said, “I would expect this to last a lot longer than you might expect.”
Minutes from the two-day Federal Open Market Committee gathering ending May 1 released Wednesday showed that, while participants assessed monetary policy was “well positioned,” various officials mentioned a willingness to tighten further if warranted.
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Fed officials have since last July held rates in a range of 5.25% to 5.5%, a two-decade high, in an effort to bring inflation back down to the central bank’s 2% target.
Policymakers have welcomed recent consumer price data showing a key gauge of underlying inflation slowed in April for the first time in six months. Still, some Fed officials indicated this week they need to see more evidence that inflation is on a sustained path down before they would have the confidence to start cutting rates.
Bostic, who votes on monetary policy this year, said Tuesday he thinks the central bank will be in a place to start lowering interest rates by the end of the year, though not likely before the fourth quarter.
Fed Governor Christopher Waller said Tuesday he needs to see several more good inflation numbers to begin interest-rate cuts, adding that holding rates steady for “three or four” months won’t tank the economy.
Bostic indicated he would be to reluctant to reverse course once the central bank does start lowering rates because of the uncertainty it would create in the economy.
“A goal that I think is quite important is to move in one direction only — so not cut and then have to raise and then cut and then raise — because I think that creates policy uncertainty,” he said Thursday.
The FOMC meets next on June 11-12.
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