Fed’s Bostic: Economy returning to normal faster than expected so policy should as well

By Howard Schneider

WASHINGTON (Reuters) – The U.S. economy is close to normal rates of inflation and unemployment and the Federal Reserve needs monetary policy to “normalize” as well, Atlanta Federal Reserve president Raphael Bostic said Monday in comments that suggested openness to a quick pace of interest rate cuts in coming months.

“Progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer,” Bostic said in comments prepared for delivery to the European Economics and Financial Centre. “In this moment, I envision normalizing monetary policy sooner than I thought would be appropriate even a few months ago.”

“Normalizing” refers to returning the Fed’s policy rate of interest to a level that neither encourages or discourages investment and spending, a level felt to be somewhat below the range of 4.75% to 5% set last week after the Fed began easing policy with a half-point cut.

Bostic said disagreement over the precise normal or “neutral” rate of interest was of little importance while rates remained this high, with balanced risks to both inflation and the unemployment rate, currently 4.2%. He said he supported the half-point cut approved last week as a compromise between the fact that inflation remains a half-point above the Fed’s 2% target, with housing prices still rising faster than hoped for, and the sense the economy and the job market are slowing.

Bostic earlier in the year expected a less aggressive pace of cuts and a later start, and said the larger cut last week “does not lock in a cadence for further moves” that will depend on incoming data.

But, he said, “inflation has fallen faster than I had expected, and the most recent data solidify my conviction that the US economy is indeed sustainably on the path back to price stability.” He noted businesses said their pricing power had “all but evaporated” and some important recent measures of inflation were below the Fed’s target.

Firms, meanwhile, are taking a more deliberate approach to hiring as well, he said, though they do not yet seem to be at the point of laying off workers.

“We have made sufficient progress on inflation, and the labor market has exhibited enough cooling, that the time has come to shift the direction of monetary policy to better reflect the more balanced risks,” he said.