Atlanta Fed President Raphael Bostic speaks with Yahoo Finance [Transcript]
Raphael Bostic, president of the Federal Reserve Bank of Atlanta, joined Yahoo Finance to discuss his outlook on inflation and the central bank's response.
Below is a transcript of his appearance, taped and aired on May 10.
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BRIAN CHEUNG: Hi I'm Brian Cheung here on the sidelines of the Financial Markets Conference hosted by the Atlanta Fed alongside the Atlanta Fed President Raphael Bostic. President Bostic, great to see you.
RAPHAEL BOSTIC: Good to see you too, Brian.
BRIAN CHEUNG: It's beautiful here in Amelia Island, Florida racing back in person again, but of course the big subject of the day is what the Fed is going to do next. So we got that 50 basis point increase last week, the largest move since May 2000. Simple question, I guess is: What's next?
RAPHAEL BOSTIC: Well for me, I think the overarching perspective is that inflation is high and it's too high and we got to do something to work against it. So we've taken good first steps. I think 25 basis points, ratcheting up to 50 because of where we've gone. I think that's the pace we need to stay at. 50 basis point increases maybe for the next two, or perhaps three meetings. Let's just keep this moving and make sure that we're doing all we can to get inflation under control.
BRIAN CHEUNG: So for a lot of Fed officials it seems like the goal is to get to neutral at least for right now, which is the short term interest rate that's not stimulative nor restrictive to the economy. What's your estimate of neutral and how fast does the Fed need to get there?
RAPHAEL BOSTIC: So you know, neutral is a concept and so it's not as if there's an equation exactly where it is. For me, it's somewhere between 2 and 2.5 percent. And then in terms of getting there, I think we just need to get there in a sort of a methodical way, so that we are really signaling the pace of where we're going. And then of course, we have to wait and see what happens. So as we are moving, we haven't really moved at a 50 basis point increment for many, many years. So there is still some uncertainty as to how the economy will respond. And so we'll be watching as we go along, but my view is like strong and steady, and let's get there and be very intentional about and purposeful about getting to that level.
BRIAN CHEUNG: So a lot of chatter, speculation about whether or not moving the Overton window from 25 basis points moves to 50 basis points moves would spur, eventually, a 75 basis point move. What's your assessment of whether or not that's something that could be on the table?
RAPHAEL BOSTIC: Well, you know, I think it's definitely on the table. For me, everything is on the table. So I really don't prejudge or predetermine, in my mind, that I absolutely won't do. But the world would have to change pretty significantly. We would need to see some real negative shock on the real side of the economy for me to really bring that into higher probability type of a possibility. It's not my baseline right now. But you know, I'm going to be open to everything, because we need to do all we can or whatever is necessary to get inflation under control.
BRIAN CHEUNG: And it's clear that the big bright line test for that is going to be inflation. We're going to get another read on inflation in the form of the Consumer Price Index tomorrow morning. I'm not going to ask you what your expectation is for that. But when would you expect broadly the bite of the 75 basis points in total hikes we’ve had between March and May to be seen in the inflation?
RAPHAEL BOSTIC: Well, that's a good question. So to me, it is heartening for me that we've already seen it take some bite into financial markets. If you look at the 30 year fixed rate, mortgage rates, they have moved far more than we have, which suggests markets are taking these things on board. And I expect that we will start to see that start to ripple through the economy more broadly. I'm hopeful that over the next several months, we will start to see that inflation level start to come down at a pretty steady level. We've already gotten to a place where month to month, we're not seeing the continued acceleration of inflation, which I think is a very positive sign. And I'm just hopeful that we'll continue as we move forward.
BRIAN CHEUNG: Anecdotally, when you have conversations with specifically households in your district, what are you hearing? President Biden was speaking earlier in the afternoon just kind of about how big of an issue inflation is. Some fiscal policies on the table — perhaps, you know, eliminating the Trump tariffs. Are these types of things that you're hearing from households in terms of what the Fed can do specifically to make sure prices go down?
RAPHAEL BOSTIC: Everyday. Yeah, I hear about this every day and everywhere I go. People are very much noticing that inflation is happening. I think they're open to understanding that a lot of this is driven by the COVID dynamic where we have supply shocks that are preventing the economy from producing this at that elevated demand. But everyone's feeling the inflation. People tell me, they tell me what the price of gas they paid this week was relative to three months ago. This is something that we definitely — and I — have taken on board: that it is hurting people. It is creating stress for them and uncertainty. And that really goes back to where I really started, which is we really need to get this under control as fast as possible, and that's exactly what we're gonna do.
BRIAN CHEUNG: One talking point that we're hearing a lot is whether or not the Fed overdid it. And that's the reason why we're in the situation that we're in right now. Is that something you also hear from households?
RAPHAEL BOSTIC: So I'm not hearing very, very many — among regular people, theories about why we have or how we got to where we are. I hear much more that— I know where we are and I'm very sensitive to this. And it's something that I'd like to see changed if possible. I actually don't think that the Fed overdid it. I think that we had great uncertainty in the economy as we were going through the pandemic experience. And for me, I think if I was going to want to do too much or too little, I'd rather deal with an economy that had strong fundamentals and foundation. We're still creating lots of jobs, we are seeing the demand that is sustained. The other alternative is: losing a ton of small businesses, having families that are in much more precarious positions, and that is actually a much more painful environment to be in.
BRIAN CHEUNG: And on the labor market, the jobs data that we saw last week showing massive job gains still in the last month. We also got an unemployment rate that's still at 3.6%. Close to the pre-pandemic levels that we had seen. Is there a risk that as the Fed tightens, that the unemployment rate is going to go up and people will be out of jobs as a result of the tightening?
RAPHAEL BOSTIC: Well, I think there is that risk, but I would also just start where you started, which is you're averaging — before last month — we were having about 600,000 new jobs a month for the last eight or nine months. We know that the job vacancies far exceeded the number of people that are filling those jobs. So the first thing that I'm expecting will happen as we start to slow down or retard demand is that vacancies-to-filling gap will narrow. So I think we're gonna see unemployment go up, that's likely to be down the road aways, and then we'll sort of deal with it then. So there is a risk. It's just not one that I think we're gonna have to really face in the near term.
BRIAN CHEUNG: How do you think about that within the context of the overall concern about the Fed tightening into a recession? Because the whole idea is to tamp down demand, so that might necessarily involve two quarters of negative GDP. And I was talking about this with your colleague in Cleveland earlier, not necessarily always the definition of recession, just that metric. But by and large, there is a concern that the labor market might show signs of recession, as this process is undergone.
RAPHAEL BOSTIC: Well, often I say I get paid to worry. So I'm very aware that these are concerns. And this is why coming through most of this year, I've used two words to describe my approach to policy: observe and adapt. Things are going to happen as we make our policies and we move things along. And my job is to pay attention to that and try to notice when there are turns such that if we move in certain ways that could contribute to more pain. And so then I want to adapt my strategy moving forward. And you know, there's a lot in this economy that is complex. All the supply side issues, the war in Ukraine, those are things that are not our policies, but they will affect what our policy will need to do. And so we just really need to pay attention as we move forward. And my goal is— this is another thing I always say is: my goal is for us to not have a recession while I'm sitting in this chair. So I'm gonna do all I can to try to get to that softer landing.
BRIAN CHEUNG: Is there a role that fiscal policy can play to help you and your colleagues on the monetary policy side out? I mean, again, talking points and the Biden administration possibly loosening the tariffs of the last administration or doing other types of measures to try to lower prices?
RAPHAEL BOSTIC: Well, certainly there are a lot of factors beyond our control that are going to determine sort of the ultimate trajectory of inflation. There's help that can come from other sources to try to either stimulate supply or reduce demand. I think the fiscal side is going to be much more on the supply issue. Because ultimately, what we have right now is an imbalance which means high level of aggregate demand and low level of supply. And as you know, when demand exceeds supply that puts upward pressure on prices. So that's that gap that we've got to try to narrow.
BRIAN CHEUNG: And then I want to ask you about the housing market. Something that's very interesting is idea that the higher costs of housing that have gone up dramatically during that pandemic are going to be longer-term impacts and crowd out possible spending in the future. I mean, is there any sort of longer- or medium-term impact that you're seeing from the rocket up in American housing prices over the last few years?
RAPHAEL BOSTIC: So we have not seen that so much, but it is a concern. I know a number of families that I talk to are expressing concerns about where are my options and how much of my income is eaten up by my housing costs. And it's just something we're very much going to have to watch. You know, one of the things I really appreciate in the network of the Federal Reserve is: we do lots of surveys to try to understand and identify whether there are those shifts. How we deal with how households deal with the current environment. And housing is going to be an important component of that. And it's something we're gonna have to monitor very closely.
BRIAN CHEUNG: And then one more question before I let you get back to the beautiful sunny sides here at Amelia Island, Florida. Quantitative tightening. The process is going to begin June 1 for the Fed to shrink its nearly $90 trillion balance sheet. The plan is to get it up to a $95 billion a month pace by fall of this year. Could you see a scenario where the Fed might want to perhaps accelerate that process if it is indeed the case that maybe a stronger drawback is needed?
RAPHAEL BOSTIC: Well first I want to say I'm very excited and pleased that we're doing this. This is something that I've been saying for a long time we needed to take care of. And it’s good to get that in motion. Ultimately, I think we are going to have to have sales. One of our principles is that most of our balance sheet holdings in this space need to be in Treasuries and not in mortgage-backed securities. And so if we're gonna get to that, sales will have to be part of the equation. We're just gonna have to really monitor in real time to figure out when the optimal time for starting that will be. It won't be at the beginning. I think what we want to do is really see how the markets respond to our pulling out some liquidity from these spaces, and then we'll sort of have to make a decision.
BRIAN CHEUNG: Raphael Bostic here on the sidelines of the Atlanta Fed’s Financial Markets Conference in Amelia Island, Florida. Thanks so much for spending time with us.
RAPHAEL BOSTIC: Always good to talk to you.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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