Fed’s Bostic Cautions Against Prolonged Restrictive Policy Stance, According to Reuters

The U.S. central bank needs to reconsider maintaining high interest rates for an extended period, as doing so could negatively impact employment, according to Atlanta Federal Reserve President Raphael Bostic. In a recently published essay, Bostic emphasized the importance of not keeping a restrictive policy for too long.

He warned that waiting for inflation to return to the Fed’s 2% target before lowering borrowing costs could lead to significant disruptions in the labor market, causing unnecessary hardship. Bostic expressed his growing confidence in the signs that inflation is on a steady path toward the central bank’s objective, noting that recent reports indicate a widespread decline in price pressures.

Federal Reserve Chair Jerome Powell has indicated that the central bank plans to reduce its benchmark interest rate from the current range of 5.25% to 5.50% during the upcoming policy meeting. The decision depends on whether the current weakening labor market conditions warrant a quarter-point cut or a more substantial half-point reduction.

The Fed aims to achieve a “soft landing” for the economy, characterized by gradual economic growth slowdown, a return of inflation to the 2% target, and stable unemployment rates. Following unexpected high inflation earlier this year, the annual price increase rate dropped to 2.5% in July, according to the Fed’s preferred measure.

However, attention has shifted to a rise in the unemployment rate, which climbed to 4.3% in July, reaching its highest level in nearly three years. This marks the fourth consecutive month of rising unemployment, raising concerns that elevated borrowing costs are suppressing labor demand excessively.

Bostic noted that while business contacts report a slowdown in hiring, few have announced plans for layoffs. He remarked that there is no sense of impending crisis or panic among business leaders, but the economic and labor market indicators suggest a loss of momentum.

Furthermore, the Atlanta Fed President cautioned that it is premature to declare victory over inflation, stressing the need for continued vigilance from him and his colleagues.