Fed’s Bostic says economy returning to normal, policy should also ‘normalize’

Raphael Bostic, President of the Atlanta Federal Reserve, believes the U.S. economy is on a sustainable path toward price stability, justifying a reduction in the federal funds rate.

In remarks prepared for the European Economics and Financial Centre, Bostic explained why he supported a 50-basis-point cut in the federal funds rate at the September 2024 Federal Open Market Committee (FOMC) meeting.

“Progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer,” said Bostic.

“The US economy is indeed sustainably on the path back to price stability,” Bostic added, citing both the personal consumption expenditures (PCE) and consumer price index (CPI) inflation measures, which have dropped to 2.5%.

He emphasized that price pressures, particularly in the housing market, have slowed.

The decision to reduce rates, Bostic explained, is aimed at recalibrating monetary policy to reflect a more balanced risk between price stability and maximum employment.

“I now see the two sets of risks as much more balanced,” he said, highlighting that inflation and employment are now nearing levels that may be considered normal.

“In this moment, I envision normalizing monetary policy sooner than I thought would be appropriate even a few months ago,” stated Bostic.

Although some anticipated a smaller rate cut, Bostic noted that the labor market’s uncertainty warranted a bolder move. However, he stressed that the reduction “does not lock in a cadence for further moves.”

Instead, future policy adjustments will remain data-dependent, taking into account the evolving economic landscape.

Bostic concluded that the Fed’s restrictive monetary stance was no longer necessary and that the shift toward a more neutral policy rate would help avoid undue damage to the labor market while continuing to promote price stability.

“It is time to normalize policy in pursuit of the Committee’s dual mandate of price stability and maximum employment,” he said.