![Fed’s Raphael Bostic: interest rates to stay higher longer Fed’s Raphael Bostic: interest rates to stay higher longer](https://i0.wp.com/content.fortune.com/wp-content/uploads/2023/09/AP23244748062016.jpg?fit=%2C&ssl=1)
Its policymakers have raised the key interest rate to about 5.4%, the highest level in 22 years, in an attempt to slow borrowing and spending and cool inflationary pressures. They are now considering whether to raise interest rates further — a move that would increase the risk of a recession — or keep them at current levels for an extended period.
While inflation has moderated over the past year, current levels show signs of stickiness. The recent increase in natural gas prices led to a slight increase in inflation in July.
Atlanta Fed President Rafael Bostic, a member of the Fed’s interest rate policy committee, sees no need to raise rates again. But Bostic favors keeping the benchmark rate at current levels until 2024. The Associated Press interviewed Bostick in late August, which was edited for length and clarity:
Q: Since March 2022, the Federal Reserve has rapidly raised key interest rates. Unemployment, however, remains very low. How can the economy withstand higher borrowing costs?
a. It’s standard economic theory and then the real world. And many times they are not consistent. Economic theory suggests that this growth should have a significant impact on economic output and employment. But we are not in normal times, and the pandemic is still having an impact on the economy and the conditions facing American households and businesses.
So we’re seeing a lot of policies that support households and businesses. We’re seeing a lot of households actually continuing to receive income but not being able to spend it because they’re in lockdown. Both of these realities leave businesses and households stronger than they have historically been at this stage of the economic cycle. So much of the austerity of our policy has been absorbed by this force.
I think the economy still has quite a bit of momentum. When I talk to bankers and others, they’ll tell me that many of their clients’ savings balances are still higher than they were before the pandemic. So that’s going to make them more resilient than we expected, while other difficulties in the economy, things like supply chains, start to sort themselves out. I think that’s what we’re seeing now.
Q: Are the Fed’s interest rates high enough to bring inflation down to its 2% target?
a. Our interest rates today are higher than the rate of inflation. That means it will limit and constrain economic growth. Last week, mortgage rates hit their highest level in a long time.
When I talk to businesses about their long-term plans, many of them start telling me that the cost of debt is high enough that it’s time to rethink these things.
Q: Some economists say that the rate hike has not yet had a full impact on the economy. do you agree?
a. I actually agree with this point of view.
This is one of the reasons I think caution should be exercised at this stage. We need not rush, we can make our policies work, continue to slow the economy and stay on track to achieve the 2% goal.
I spoke to business leaders again, and they told me that the slowdown was here, and it was manifesting itself in a certain way. The extent of the economic slowdown is widening. People are telling me they’re starting to see more and more slowdowns in more and more areas of the economy. But overall things are still pretty strong.
Q: Do you think we can achieve a “soft landing”? (A soft landing occurs when the Fed manages to curb inflation without causing a deep recession.)
a. I never use the term “soft landing”. But I will say this: I never foresaw a recession. I have always believed that there is enough momentum in the economy that we can bring inflation down to 2% without a massive disruption in employment.
I’m happy to say that we’ve seen that so far. I’m not declaring victory. I will continue to be diligent and watchful to ensure that inflation remains on track. But we are still motivated. Inflation is still falling and we are in a restrictive stance, which should lead to continued declines in inflation.
We’ve seen some adjustments in employment over the last six to eight months, which also tells us that things are slowing down in a relatively orderly manner, which also comforts me because our policies are working. Excellent.
Q: Do you think keeping the federal funds rate high for an extended period of time is a way to fight inflation, rather than raising rates further?
a. We’re going to have to keep interest rates higher for longer than historically because we need to make sure inflation stays at 2%. We’re going to have to keep restrictive measures in place for quite some time until we’re sure, sure, sure, sure, sure, sure that inflation doesn’t rebound further away from our target. I’m not even considering a rate cut until the second half of 2024.
We’re going to be at restrictive levels for quite some time, and that’s just assuming that the last bit of the inflation trajectory will be steady but relatively slow.
Svlook