MNI: Fed's Bostic Sees 1 Cut This Year, Inflation Greater Risk

Rising inflation presents a greater risk to the Federal Reserve's dual mandate than a deteriorating labor market even as hiring has slowed, and a single 25 bp rate cut this year would appropriately reflect the rising risk to the Fed's full employment goal, Atlanta Fed President Raphael Bostic said Wednesday. 

"Today, I judge policy to be marginally restrictive. I believe that, while price stability remains the primary concern, the labor market is slowing enough that some easing in policy — probably on the order of 25 basis points — will be appropriate over the remainder of this year," Bostic wrote in an essay posted on the Fed bank's website. 

"I do think if we continue to see labor market cooling, the balance of risks could move in the favor of risks to the employment mandate being greater than to inflation," he told reporters on a call ahead of the essay's publication. 

The jobs and inflation data to come over the next week and a half will "allow me to recalibrate and make a new assessment of what the relative risks are," he said. 

SLOW TARIFF EFFECTS

The economy has yet to see even the full first-round effects of tariffs on consumer inflation, Bostic said, citing surveys of business executives fielded by the Atlanta Fed. 

The Fed's preferred PCE inflation gauge has run above target for four years and progress "essentially stalled in the fall of last year," he said. Prices of core services have lingered above pre-pandemic averages, while goods prices are also now increasing as tariffs average 15%-18% across imports.

"I continue to believe that the effects of tariffs on consumer prices won’t fade fast, and in fact will not fully materialize for some months," he said.  (See: MNI INTERVIEW: Tariff Inflation Impact Broadens- ATL Fed Study)

He's also worried about the psychology of a marketplace where reports of coming higher prices have circulated for eights months. "To the extent that’s a drumbeat consumers read about, that translates into psychological shifts such that people shift their behavior to be much more precautionary perhaps or start to change their valuation of their long term investments in ways that could be structural on the economy. That’s yet to be learned and could be quite material."  

Inflation expectations have stayed low, but "I will not be complacent and simply assume expectations will remain anchored and another inflation outbreak won’t happen. My team and I will be monitoring developments regarding expectations quite closely," he said. 

COOLING LABOR MARKET

Labor demand has cooled at the same time that the growth of labor supply has slowed, keeping the economy near full employment, Bostic said. Businesses are also not raising red flags on layoffs to the Fed. 

That said, the labor market can turn quickly, and he's watching metrics including payrolls, the length of time workers take to find employment, wage growth, hiring and quits rates, and sentiment. 

"If data come in a way to suggest labor markets weaken considerably, I’d be open to pulling forward our movements to reduce rates," he said. "My outlook is we’ll continue to see the slowing we’ve seen, and as long as that stays in a steady, orderly pattern, I think the inflation mandate is a greater concern for me."