Tuesday, December 12, 2017

© Reuters. Federal Reserve Chairman Janet Yellen speaks during a news conference after a two-day Federal Open Markets Committee (FOMC) policy meeting, in Washington© Reuters. Federal Reserve Chairman Janet Yellen speaks during a news conference after a two-day Federal Open Markets Committee (FOMC) policy meeting, in Washington

By Ann Saphir

AUSTIN, Texas (Reuters) – One of the Federal Reserve’s newest policymakers said on Friday he continues to believe the U.S. central bank should raise interest rates again by the end of the year, though he is “not wedded” to that position.

“We, in our forecasts of movements for the year, had said we expected three hikes in the course of 2017. I am still in that space,” Atlanta Fed President Raphael Bostic told Reuters in an interview on the sidelines of a Fed conference in Austin, Texas.

But he added, “I am not wedded to anything,” and said he would take a wait-and-see approach.

Bostic, who started his job four months ago, has a vote next year on the central bank’s rate-setting committee.

U.S. employment fell in September for the first time in seven years as Hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring, a signal the storms undercut economic activity in the third quarter.

Bostic said his staff would be analyzing the data to see if the decline was within expectations or if it reflected underlying deterioration.

“Some of the recent data before this jobs report suggested that the economy was still going strong,” he said. “If we continue to see that strength I’ll be comfortable with that movement, but the numbers have surprised us before.”

Last month, the Fed left rates unchanged and announced the well-telegraphed start to a gradual shrinking of its $4.5 trillion balance sheet, which was swollen by massive purchases of Treasury bonds and mortgage-backed securities in the aftermath of the 2007-2009 financial crisis and recession.

Most policymakers at last month’s meeting forecast further, gradual rate hikes ahead, including one more this year and three next year.

With unemployment in a range of 4.2 percent to 4.4 percent, “we’re going to see robust growth, and we should see, start to see inflationary pressures,” Bostic said, echoing the broad consensus on inflation among Fed policymakers including Chair Janet Yellen.

“Fed policy for the last two years has been kind of a slow, steady return to more normal levels. I would expect that basic policy approach to continue through 2018, absent some sign that either the economy weakens dramatically or suddenly, or if it accelerates faster than we might expect.”

TAX DEBATE

Bostic said his economic forecasts do not include any changes to fiscal policy.

Some of his colleagues have begun to push back on the Trump administration’s assertion that its tax cut plan would boost the economy, cautioning it could instead trigger high inflation, unsustainable debt and an eventual return to sub-par growth.

“At this stage we only have broad outline strokes. The details will matter,” Bostic said. Among the unknowns, he noted, is how companies would use any savings from the proposed tax overhaul, which includes lowering the corporate tax rate to 20 percent from the current 35 percent.

“If they use it to invest, then we might see some more robust growth and then we would have to keep an eye on what happens with the level of prices,” Bostic said.

“But we’ve had other episodes where cash windfalls have been used to buy back stocks and those sorts of things, in which case you are not getting to the same level of productive transmission of that policy.”

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