January 8, 2018 / 5:43 PM / in 10 months

Fed's Bostic says three rate hikes in 2018 may be too much

ATLANTA (Reuters) - The Federal Reserve may only need to raise interest rates two times in 2018 given weak price pressures and possible loss of public confidence in the central bank’s ability to hit a 2 percent inflation target, Atlanta Fed President Raphael Bostic said on Monday.

President of the Federal Reserve Bank of Atlanta, Raphael W. Bostic seen in this handout photo obtained by Reuters October 6, 2017. Federal Reserve Bank of Atlanta/Handout via REUTERS

Bostic, a voter on interest rate policy this year, also added his voice to a group of Fed officials concerned that central bank action may “invert” the yield curve and make long-term rates lower than short-term ones, historically a signal of future recession.

The Fed’s recent increases in short-term rates have not been matched by similar increases in 10-year Treasury note yields.

“Long-term rates have been much stickier...I am going to do all I can to make sure our policy does not invert the yield curve,” Bostic said. “If we got close to it I would argue strongly that we should be extremely cautious.”

Bostic said his base case for 2018 was for two or three rate increases, slightly below the median of three rate increases expected by his colleagues.

The central bank raised rates three times in 2017.

Bostic is the second Fed official in recent days to say the central bank may only raise two times this year, a sign that continued low inflation may reshape the Fed’s actions in 2018.

“The chorus seems to be growing more vocal about the need to raise rates more slowly...No inflation, not many more rate hikes. Bet on it,” said Chris Rupkey, chief financial economist at MUFG.

Though unemployment is low and growth may hit 2.5 percent in 2018, Bostic said weak wage growth and inflation are two reasons to be guarded.

In addition, he said he is concerned the public may be losing confidence in the Fed’s commitment or ability to reach its inflation target, “anchoring” expectations below that level. Public and market expectations are considered an important component in inflation outcomes, and Bostic said recent survey evidence “indicates that individuals may not be completely convinced...This possibility is one factor that might argue for being somewhat more patient.”

Bostic added that the estimated “neutral” rate of interest that would keep inflation at target and economic growth at trend may have slipped to “close to” 2 percent. If true, it means the Fed could only raise rates two or three more times, from the current range of between 1.25 percent to 1.50 percent, before monetary policy is no longer “loose” and encouraging economic activity.

Even as it raises rates the Fed wants to remain “accommodative,” with a federal funds target below neutral.

Reporting by Howard Schneider; Editing by Paul Simao and Andrea Ricci

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