)
Mr. Raphael Bostic, President and CEO of the Federal Reserve Bank of Atlanta, addressed the fight against inflation during an event live streamed on Bloomberg TV.
He stated that continued progress on inflation is possible without additional changes to the federal funds rate. He further explained that if inflation continues to fall, as he expects, the current policy stance may effectively tighten as real short-term interest rates increase—a phenomenon he referred to as "passive tightening."
“We are just beginning to see signs that the cumulative effects of monetary policy adjustments are appearing in the real economy,” Mr. Bostic said to a capacity audience at The Round Room in Mansion House, Dublin.
Two-Way Engagement Between Regulators and Industry
Earlier in the day, Mr. Bostic participated in two roundtable discussions. The first was with members of the Irish business media, and the second with directors of the Irish Association of Investment Managers (IAIM).
He told both groups, “All central banks are dealing with the same issues, with local tweaks,” adding, “In an emergency, we must do emergency things, and when we get out of emergency times, we need to get out of doing emergency things.”
Michael D’Arcy, CEO of IAIM, emphasised the importance of open dialogue: “Two-way engagement with financial regulation policymakers and the asset management industry is vital to ensure we share opportunities and challenges and understand each other’s perspectives in relation to serving investors.”
Topics discussed during the roundtables included the impact of the pandemic, commercial real estate, and the role of central banks in navigating these challenges.
“Green Shoots of Hope” in Services Inflation
At the IAIM annual dinner, Mr. Bostic noted encouraging signs in inflation trends. “When will restrictive monetary policy start restraining inflation more powerfully? Put simply, not as soon as I’d like,” he stated.
However, he highlighted positive developments, particularly in the services sector, where price increases have been edging lower in recent months. “This is an emergent and promising trend, a green shoot of hope, in a category that accounts for more than half of the consumer market basket,” he said.
Mr. Bostic cited the Federal Reserve's surveys, which indicate firms are reducing price increases and expecting slower cost and wage growth in the coming year. He explained that this gradual moderation in price pressures, along with the narrowing distribution of price increases, suggests inflation is abating sustainably.
Inflation Should Continue Falling as Restrictive Policy Bites
In his speech, Mr. Bostic reiterated the importance of patience in assessing the effects of monetary policy.
“Monetary policy has only been truly restrictive for eight or nine months,” he explained. He views the initial rate hikes as the removal of accommodation, with subsequent increases pushing policy into restrictive territory.
“Pausing the policy rate increases, as we did this month, does not mean we are shrinking from the inflation fight,” he said. “If inflation continues to fall in the coming months, as I believe it will, our current policy stance may effectively become tighter as real short-term interest rates increase.”
Mr. Bostic referred to this dynamic as "passive tightening" and emphasised its role in continuing the path toward the Federal Reserve’s 2% inflation target.
Balancing Risks and Lessons from History
While optimistic about progress on inflation, Mr. Bostic stressed the need for vigilance. He expressed concern about the potential challenges of achieving the “last mile” in bringing inflation down to 2%, citing inertia in pricing behaviours and wage demands.
He also pointed to lessons from the Great Inflation of the 1970s and 1980s, when indecisive monetary policy prolonged inflation and economic hardship. “That’s a history we do not want to repeat,” he said.
While his baseline forecast does not anticipate further rate hikes in the near term, he clarified that no rate cuts are expected in 2023 or 2024. “We can meet our inflation objective without a severe economic downturn, but I will remain resolute in the battle to tame inflation, even in the face of some rise in unemployment.”
Extraordinary Challenges for Policymakers
Concluding his remarks, Mr. Bostic acknowledged the unprecedented challenges facing policymakers worldwide.
“Pandemic-related effects on the economy have not fully unwound. US and global economic growth appear to be slowing, and there is concern about financial stability,” he said.
He emphasised the Federal Reserve’s unwavering commitment to bringing inflation down despite these uncertainties. “The Federal Open Market Committee will not waver in the fight to bring down inflation.”