Federal Reserve needs to push rate to 5%-5.25% and hold into 2024, Bostic says

JimVallee

Atlanta Fed President Raphael Bostic said Wednesday that he expects the federal funds rate will need to reach between 5% and 5.25% and 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 haven'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 mild 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%.

Comments

[mizesa]

Hiding out in instruments such as SGOV and TFLO earning around 4.5% seems to be the safe play for now. Looks as if they are headed to 5% in a month or so.

The Fed ALWAYS claims that it can create a soft landing. However, that rarely happens. If, as per usual, there is instead a hard landing, having a mountain of cash to pick up the bargains is the smart thing to do.

[Phil Dumfee]

No, they need to pause to let the soft landing happen.

Higher structural inflation balance has been achieved.

[DrewMcVay]

Don’t think 5-5.25% is high enough unfortunately, and if it’s not then we’ll be talking about raising much higher to stop the next wave of inflation.

[OverTheHorizon]

If we’re lucky.

[Logan Kane]

My models are saying 6% is what they'll need to push inflation down. 50 bps hike likely inbound.

[Phil Dumfee]

@Logan Kane that's an old world out of date model. The world has changed.

[Logan Kane]

This time is different?

[Zacateca]

pumping trillion $ of free money to crypto bubbles has consequences.

[Jason Alberty]

It needs to stay over 5% well into 2030. As soon as they pivot back to QE, the inflation will be immediate and far worse than it previously was.

[User 31614085]

try something with a 6 handle...

[2MuchDebt]

It's amazing to me how these Fed officials don't dig into the data. "consumer spending has remained strong". True if you don't look at the sustainability of it and how it's being financed. Credit card usage is soaring and personal savings rate has plummeted. These are not sustainable long-term trends and so consumer spending will slow / decline in the relatively near future and thus higher interest rates and higher inflation will negatively impact consumer spending, which is what the Fed wants.

[User 31614085]

@2MuchDebt I mentioned this in another article..but bankruptcy filings this year are the highest since 2009.

[ccx]

@MJL987 KB Homes cancellation rate in Q4 exceeded their peak value during the GFC. MBA mortgage data as of last week was the lowest in 28 years. Haven't checked today's report yet but given that it was -5% from last week's volumes it's probably another record-setter. It's abundantly clear that the economy is rolling over but us serfs can't count on the media to report anything honestly and the trouble is that many are either desperate to believe the media for personal reasons or incapable of moving past the naivety that there's truth in economic/market reporting at this point in time. WSJ is owned by the same entity that owns Realtor.com. Just one example of the major conflict of interests between pedigreed investment media and the real estate market narrative that "supply is low" "prices won't drop" "rates have softened from their peak providing homebuyers with an entry point". In an age of information people seem to be drowning in disinformation.

[User 31614085]

@ccx it's amazing that bank stocks are holding up so well..they are the ones holding the massive amount of credit card debt that's about to be wiped off their books thru bankruptcy proceedings..

[Wez]

You mean, back to normal.

[Winnertakesall]

Based on the earnings being reported I would say the NASDAQ is still 45-70% overvalued.

[Solojif1]

Time to claw back all those government stimulus checks through high credit card interest rates and 7% mortgages. Hope you all enjoyed your “free” money, PPE loans, $0.10/gal discount on gas ( complements of the SPR draw down) and corporate bailouts (looking at you airlines).

[dmzporter]

@Solojif1 actually, what depresses me as a middle class guy is that I know a lot of savvy folks who milked the PPE and bennies, and have inflation resistant stocks, housing... and then there's all the army veterans I served with.

Some of them did well, but many after 3-5 combat tours aren't doing well. Divorces, rental increases, lay offs--or forced into gig economy roles--tell me they are squeezed. Child payments, credit card debt, etc.

We can cast aspersions... I know some Tesla incel is waiting to crow about how rich they got on Tesla stock. But if you have a sense of the suffering in the lower classes, you realize that the free lunch benefited people like me. I have a rental home, a house, 3 cars--wife 3 kids--nice home. Many of my assets will be fine. I can buy groceries and don't need to know what the price of milk is.

I find myself very lucky at 42 in that respect.

But many others aren't so lucky, and the moral hazard of the government picking winners and losers angers me.

[User 31614085]

@dmzporter 3 cars, 3 wives and 3 kids?? you are lucky!! j/k ;<)

[ccx]

@dmzporter I'm a business owner that didn't take PPE as I didn't feel it was right of me to ask for a handout but literally every other business owner I know took the $ and so many of them gloated in private about how they misappropriated the money. Makes me so mad. PPP was a massive financial scam/fraud. Obviously the majority of the money likely did good, in the sense that it fulfilled opex costs to keep businesses alive and employees paid, but there was still an appalling amount of dollar volume siphoned off to fraud. I just get so mad at how you can't count on anyone to do the right thing for the sake of others. Apparently I am the moron for believing that now and then you can sacrifice for the well-being of others. Some society we've got!

[anon_cowrd]

what Fed needs to do reduce balance sheet more aggressively.

[John McCoy]

5%-5.25% and hold sounds about right. I think I and the market can live with that for a while.

[ccx]

The 10/2 spread has been negative since the beginning of July '22. It's never been negative for as long as a quarter since 1980 (longest dated chart I found). Credit markets are telling a way different story. Does anyone still believe these liars? "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." This is drivel intended to placate those that respond to appeals from authority.

[Chanutan]

@ccx Campbell Harvey is the creator of this indicator - inverted yields. He recently said, once you adjust short term yields for inflation, and long term yields for expected inflation, as the indicator was intended to reflect, that the yields were in fact, not inverted. He said the inversion does not at this point in time reflect an incoming recession.

[ccx]

@Chanutan In practice, the metrics importance provides 12-24mos. indication on capital markets not economic theory that if we contort ourselves with adjustments that historically never mattered to the pundits it's "actually not as moribund as it seems". Face it dude, there's a massive astroturfing campaign in our media when it comes to the state of the economy. If Trump were in charge do you really think the investment media would be as obtuse to the economic data as they currently are? Why did we receive reports last Spring about the WH asking media not to report on recession? Why did we have to reinvent the meaning of a recession? Up is down, black is white in this real-life version of Orwell's 1984. And for that matter, what are the two distinct inflation values being applied to the 2yr vs. the 10yr. to arrive at this spurious argument that the real 10/2 spread is positive?

[Chanutan]

@ccx tradingeconomics.com/...

[PanicFirst]

5% seems low

[vooch]

@PanicFirst

Agreed - 5% is less than inflation. A neutral policy would be inflation plus 2% or even plus 3%