Fed’s Bostic says more than 3 hikes possible this year, but needs to see how economy responds

Raphael Bostic, Atlanta Federal Reserve president, stated Wednesday that he expects to raise interest rates 3-4 times this year. However, he said the central bank wasn’t committed to a particular plan.

Interview on CNBC’s “Squawk BoxThe policymaker stated that he was less aggressive than market rates views.

He said, “In terms interest rate increases, I currently have three forecasts for this year.” Although I lean towards four, we will need to watch how the economy reacts to our initial steps in the second half of 2011.

The current market pricing expects six to seven hikes each of 0.25 percentage point or more. Bank of America has recently predicted seven steps by the central bank to combat inflation, which is at its highest in 40 years.

Bostic said that 50 basis points would be the minimum rate for the Fed to make a move in an interview with Financial Times. At its March meeting, the Fed indicated that they will likely enact their first rate increase in over three years.

Bostic didn’t commit to that speed in the interview with CNBC.

He said, “For me I think very much about a 25 basis-point perspective.” But I wanted everyone to know that all options are available and that there is no set path for how rates will move in the future. The data will show us whether a move of 50 or 25 basis points is acceptable.

Loretta Mester from Cleveland Fed stated separately Wednesday that although she expected a rate rise in March, she was not able to commit to the pace.

In a speech to the European Economics and Financial Center, she stated that “while the Omicron variant might weigh on activity in near term”, the high level of inflation and tight labor markets made it compelling for them to reconsider their stance on monetary policy. In the event of an unanticipated turn in the economy I am in favor of moving the funds rate higher in March to begin eliminating accommodation.

Monitoring inflation’s pace

Bostic made these comments just days before Labor Department released its most recent inflation reading, which was based on January’s consumer prices index. Dow Jones polled economists to predict that the 12-month pace will be 7.2%. That would mark the fastest rate since 1981.

Bostic indicated that he was more concerned about the monthly acceleration at 0.4%. This is slightly less than what was projected for December.

If inflation can be controlled, the Fed doesn’t need to be so hawkish.

But he does believe that the Fed should reassess its ease policy. In addition to reducing its benchmark short term borrowing rate to nearly zero, the Fed has been purchasing billions of bonds per month. This has helped to increase its total assets to just shy $9 trillion.

Most markets expect that the Fed will soon allow profits from these holdings to run off. The only problem is how much shrinkage the balance sheet will be. Bostic stated that he believes the initial stages of the process can be very aggressive.

Bostic said that he was optimistic on the growth of the year and didn’t believe the Fed would have to take any measures to slow it down.

He said that the first portion of the reduction was possible to make “pretty significantly”. I believe we need to look at ways of eliminating excess liquidity from the market so we can make decisions on how the balance sheet should be used in order to tighten our policies.

Mester also stated she thinks that the Fed is capable of aggressively reducing its balance sheet.

She favors an approach that would see the central bank sell $2.7 trillion of mortgage-backed securities. This would reduce the Fed’s total holdings to $5.7 trillion, which would be the only Treasurys.

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