Atlanta Federal Reserve Bank President Raphael Bostic said on Thursday that monetary policy is not as effective in slowing economic growth as previous cycles, making it more necessary to maintain high interest rates for a longer period of time to curb inflation.
He pointed out that although he is pleased that inflation has returned to a downward trend after exceeding expectations in Q1, Bostic emphasized that progress is still slow. He said, "We have not yet passed the stage of concern, and the road for inflation to return to our target is still long."
Bostek pointed out that even in the latest consumer price index, the proportion of goods with price increases exceeding 3% or 5% is still higher than the proportion in normal environments.
At the same time, Bostic also pointed out that there are almost no signs of difficulties in the labor market.
"Employment growth has always been very strong... This tells me that there is still a lot of vitality in the economy, which makes me feel at ease in maintaining a higher level of constraint because I don't think we are at risk of falling into a contraction environment today," he added.
According to him, due to the evolution of the economy during the pandemic, people and businesses may not be as sensitive to interest rates. And with so much debt in the economy lowering interest rates through refinancing, the impact of the Federal Reserve's main monetary policy tools has weakened.
Persist in raising interest rates later
Bostek said on Tuesday that he believes the Federal Reserve will start lowering interest rates before the end of this year, but it is unlikely to happen before the fourth quarter. On Thursday, he emphasized that he believes the Federal Reserve may need to postpone interest rate cuts until the last three months of this year.
Part of the reason is due to recent feedback from business owners who have stated that they will wait to deploy capital before borrowing costs become more attractive.
"I have actually truly accepted this... We may need to be more patient and more certain that inflation is moving towards the Federal Reserve's 2% target before considering a rate cut," he said.
Since July last year, Federal Reserve officials have maintained interest rates in the range of 5.25% to 5.5%, the highest level in 20 years, with the aim of reducing inflation to the central bank's target of 2%.
The latest meeting minutes released by the Federal Reserve on Wednesday show that policymakers are increasingly concerned about inflation, believing that policy rates need to be maintained at current levels for a longer period than previously expected. Officials emphasize that they lack confidence in relaxing monetary policy and lowering interest rates. Compared to his colleagues, Bostic's position is more firm, and he has the right to vote on this year's monetary policy.
Finally, Bostek also hinted that once the Federal Reserve starts cutting interest rates, he will not be willing to reverse policies because this will bring uncertainty to the economy.
"I think a very important goal is to only move in one direction, not to cut interest rates, then raise them, then lower them, and then raise them, because I believe this will create policy uncertainty," he said.