On Monday, Atlanta Fed President Raphael Bostics suggested that the Federal Reserve may only hike up interest rates two times this year because of weak price pressures and the loss confidence in the central bank’s capability to reach a 2 percent inflation target.
Bostic also added his concern that central bank actions may “invert” the yield curve and make long-term rates lower than short-term ones, generally an indication of future recession. Recent Fed increases in short-term rates have not been followed by 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 called for two or three rate increases, to some extent lower than the median of three predicted by his colleagues. Last year, the central bank hiked up rates three times. Bostic is now the second Fed official to recently say that it is possible that we might only see two rate increases this year, an indication that continued low inflation may change the way the Feds typically work.
“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.
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Though unemployment is maintaining a low and growth could reach 2.5 percent in 2018, Bostic believes that weak wage growth and inflation are two reasons to remain cautious. Bostic also added that he wouldn’t be surprised if the public has lost confidence in the Fed’s ability to hit its inflation target.
Public as well as market expectations are reflected as important factors of inflation outcomes, and Bostic stated that recent data “indicates that individuals may not be completely convinced…This possibility is one factor that might argue for being somewhat more patient.”