Raphael Bostic is prepared to cast his vote to lower interest rates later this year. But his vote to lower the fed funds rate is far from certain.
Bostic is the president of the Federal Reserve Bank of Atlanta and a voting member of the Fed's opening market committee, which decides the central bank's short-term target interest rate.
"Sure, we've made great progress. I'm really pleased with the progress that we've made. But the reality is that inflation remains too high," Bostic told WLRN on Monday.
WLRN was the first news organization to speak with Bostic since he first signaled his intention to lower interest rates in the fourth quarter in an essay the Atlanta bank published Thursday.
“I continue to believe conditions will likely call for a cut in the federal funds rate in the fourth quarter of this year," Bostic wrote.
The most recent inflation data reported the general price level had risen to 2.6% in May from a year ago. The central bank's favored inflation gauge is the Personal Consumption Expenditures figure from the Bureau of Economic Analysis. It works to capture changes in how people spend money when inflation changes, unlike the more static and better known Consumer Price Index.
"I think it's really inappropriate for anyone to draw strong conclusions about a path for policy based on one data point or one month's data point," Bostic said.
The Fed 's target inflation rate is 2%. For most of its life the bank did not have a specific numerical goal for inflation. It adopted its 2% standard in 2012. In 2020, it acknowledged inflation had oftentimes fallen below 2% and that it would allow it to rise "moderately" above that target for "a period of time." That tweak in its stance came just six months before the COVID-19 pandemic upended all economic forecasts and planning.
Nationally, inflation hit a 40-year high two years ago. It kept climbing in South Florida and stayed elevated thanks primarily to housing costs.
Inflation is thought of as a basket of goods and services — things households spend money each month such as electricity, milk, and haircuts. While the price hikes for goods have cooled quite a lot, the price trends for services remains strong.
The regional inflation rate in South Florida was 4.5% in April, the latest month of available data. Services inflation was 5.9% compared to a year earlier.
"What I've tried to do is look at some of the secondary components of inflation and think about things more distributionally," Bostic said. "And when you look at something like that, what you find is that the high inflation pressures are much broader than they have been historically."
For example, Bostic cited the proportion of items and services measured each month that continue to see prices rise by at least 5% from a year earlier. According to his analysis, about a third hit or exceed that level whereas a normal proportion would be closer to one in five.
"That tells me that the foundation under that (overall inflation) number is not as solid. And there might be reasons to expect that it may stall out at that level," Bostic cautioned.
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It has been almost a year now since the central bank has kept its interest rate above 5%. In August, it hiked its target short-term interest rate to between 5.25% and 5.5%, capping a historic period of rate increases in response to a 40-year spike in inflation. The interest rate increases more than doubled the rate on a 30-year mortgage, in addition to boosting borrowing costs on loans for autos, businesses and credit cards.
However, the higher borrowing costs have not hurt home prices. And that has helped keep South Florida's inflation rate stubbornly high compared to the rest of the U.S. Housing – or shelter as the economic statistics refer to it – is the largest component of the basket of goods and services used to compute inflation data. South Florida's consumer inflation has almost returned to 2% when housing costs are stripped out.
"Housing still remains elevated in terms of its contribution to inflation," Bostic said. He thinks one reason is people staying in their homes if they locked in a lower mortgage rate a few years ago. That has contributed to a low supply of houses, especially single family homes, for sale on the market.
The Federal Reserve has two goals — steady prices and maximum employment. It has been focused on reducing the inflation rate to stabilize prices. Meantime, the job market has continued growing. National unemployment was 4% in May. It was 2.7% in South Florida. While the regional jobless rate has risen in the past few months, it remains historically low. Employers have been complaining about a shortage of qualified workers.
While hiring has remained decent, Bostic noted, "most business contacts and business leaders that I talked to are in more of a watch and wait mode. There's still uncertainty as to sort of how this economy is going to evolve."
One of those uncertainties is the U.S. election. Voting may be underway by the time Bostic votes to lower interest rates if he is convinced inflation is on a sustainable path to 2%. However, he flatly rejected any notion the central bank would considered the election calendar when deciding interest rates.
"What I've heard repeatedly over the over my whole tenure here is that when the Fed is late on policy that has very bad downstream effects on on the economy. So it's in the country's interest for us to be making decisions on time (and) in the right way. That's how I've always approached it," he said.
The next time Bostic and his fellow Federal Reserve interest rate committee members meet is in late July.
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