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Bostic suggests more room for rate hikes, backs moving Fed policy to neutral

Raphael Bostic, the Federal Reserve Bank of Atlanta president, said Oct. 5 he thinks the Fed should keep raising interest rates until it reaches a "neutral" policy stance.

Some of his colleagues at the U.S. central bank have backed potentially increasing the benchmark federal funds rate to a level where the Fed starts holding back economic growth, but Bostic declined to go that far in prepared remarks for an Atlanta event.

"Current conditions suggest, to me, that we ought to get to a policy stance where our foot is neither on the gas pedal — what we call an accommodative policy — nor on the brakes — what we call a restrictive policy," he said.

Bostic, who votes on the Fed's monetary policy committee this year, has supported the Fed's gradual rate hikes so far — and did so again Sept. 26. But he has indicated he would not support another rate hike this year, despite most Fed officials signaling they would back another move.

Still, Bostic suggested he could see more room for rate hikes in the future because incoming economic data "have come in stronger than I had been expecting earlier this year."

"So much stronger, in fact, that the central question in my mind is whether the apparent strength in GDP and job growth is a signal that I have materially underestimated the underlying momentum of aggregate demand," he said. "If that's the case, the potential for overheating would require a higher path for rates than what I had been thinking."

Businesses have "struck a largely upbeat tone" about the current environment, Bostic said, though he also added that his contacts have not materially changed their outlook for the rest of the year and 2019. Consumer spending has also been picking up, but much of the recent increase has not been for longer-term products such as cars or large appliances, which Bostic said may be a sign that "households are exercising prudence, not wanting to take big, irreversible bets."

"Despite high levels of sentiment and improved balance sheets, households, like businesses, are continuing forward with caution," he said.

Bostic spoke hours after the latest U.S. jobs report showed job gains came in below estimates in September, though the unemployment rate fell to 3.7%, the lowest level since December 1969.

Asked about that report on Bloomberg TV, New York Fed President John Williams said it is another indicator that the U.S. economy has "good momentum going forward." He also said the Fed is not seeing any inflationary pressures in the near term despite a tighter labor market, echoing the view from Fed Chairman Jerome Powell.

"I think this is a bit of a Goldilocks economy ... low unemployment, strong job growth, low and stable inflation," he said. "This is good."