In a recent policy essay, Atlanta Fed President Raphael Bostic expressed optimism about the direction of inflation in the U.S., suggesting that the Federal Reserve might cut interest rates later this year.
Bostic highlighted that inflation, which had been a major concern, is showing signs of narrowing. Recent data indicate progress, with fewer goods and services experiencing price increases above 5% annually. This is a positive shift towards pre-pandemic levels and resembles the trend seen last year when inflation was decreasing rapidly.
“It’s moving in the right direction,” Bostic noted, referencing this key metric in the Fed's fight against inflation, which soared to a 40-year high in 2022.
Despite this progress, inflation remains elevated. The personal consumption expenditures (PCE) price index rose by 2.7% annually in April, still above the Fed's 2% target. However, Bostic believes that conditions may justify a federal funds rate cut in the fourth quarter of this year. He emphasized the need for patience, suggesting the first cut should happen once there's a clear trajectory back to the 2% inflation target.
Investors are anticipating rate cuts to start in September, with expectations of two quarter-percentage-point reductions by year-end. Bostic, however, indicated flexibility in his approach, stating, “There are plausible scenarios in which more cuts, no cuts, or even a raise could be appropriate. I will let the data and conditions on the ground be my guide.”
Recent data on jobs and economic growth support Bostic's view of an orderly deceleration in economic activity, aiming to balance demand and supply. Businesses in his southeastern district still see inflation as a primary concern, but most believe current hiring and employment levels are sustainable.
Bostic is confident that the Fed can achieve its inflation goals while maintaining historically tight labor markets.
Stay tuned for further updates as we monitor the evolving economic landscape and the Fed’s response.
