January 9, 2019 / 1:25 PM / 10 months ago

Bostic: Fed needs to be patient, seek 'greater clarity' on economic risks

CHATTANOOGA, Tenn. (Reuters) - Firms are growing cautious and hesitant to invest, a likely drag on growth in 2019 that should leave the Fed patient about further rate increases until there is “greater clarity” about the direction of the economy, Atlanta Federal Reserve bank president Raphael Bostic said on Wednesday.

FILE PHOTO: Federal Reserve Bank of Atlanta President Raphael Bostic participates in a panel discussion at the American Economic Association/Allied Social Science Association (ASSA) 2019 meeting in Atlanta, Georgia, U.S., January 4, 2019. REUTERS/Christopher Aluka Berry/File Photo

Bostic, who earlier this week said the Fed was likely to need at most a single rate increase this year, elaborated on that view as driven by conversations with business executives who say they have become more defensive in preparing for slower growth by paying down debt and holding off on new plans.

Those conversations “are not consistent with the business sector ramping up,” Bostic said in remarks prepared for delivery to the Chattanooga Area Chamber of Commerce.

As a result the Fed could take time and take stock of whether those doubts materialize into slower than expected growth - or even a slide serious enough to cause the Fed to reduce rates.

Bostic said his base case is for still strong growth in 2019, but that he is taking nothing for granted and sees no “urgency” for the Fed to move, or to raise rates high enough to actually restrict economic growth.

“We just moved in December. We should let the economy run for a while, see how it has responded to that,” said Bostic. “I am comfortable hanging out and seeing if there is evidence,” of how risks like the ongoing debate over global trading rules gets resolved.

Bostic is not a member of the Fed’s rate setting committee this year, but his views reflect a growing sense at the Fed that recent wild moves in financial markets, and concern among “real economy” executives both need to be taken seriously at the Fed.

Executives “are starting to examine their own business strategies and initiatives in anticipation of slowing economic conditions either through deleveraging or holding off on expansionary plans,” Bostic said.

Concerns about ongoing world trade tensions, and how they may be resolved “have dominated the conversations.”

What Bostic called the “dichotomy” between apparently weakened business sentiment and still strong economic data have created a dilemma.

Unemployment at a 50 year low and inflation around the Fed’s 2 percent target would argue for possible further interest rate increases. Yet both real economy business leaders and financial market investors — Main Street and Wall Street — “indicate heightened uncertainty and concern,” said Bostic.

After raising rates on a roughly quarterly basis for the past two years, the central bank is expected to slow its pace this year. Many investors feel it will not, or should not, raise rates at all.

Bostic said that even as data continue to show good economic performance, growth will slow, and business and market sentiment has taken that to heart.

“The appropriate response is to be patient in adjusting the stance of policy and to wait for greater clarity,” he said. “All the available evidence at the moment points to caution regarding firms’ approach to expansion. As long as that caution exists I suspect it will act as a natural governor” on growth that will require the Fed to do less.

Reporting by Howard Schneider; Editing by Chizu Nomiyama

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