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Bostic backs moving Fed policy back to neutral amid 'solid' economy

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Bostic backs moving Fed policy back to neutral amid 'solid' economy

The Federal Reserve should keep raising interest rates to move its policy stance to a neutral level, Atlanta Fed President Raphael Bostic said Sept. 5.

Bostic, who votes on the Federal Open Market Committee this year, said the economy is in a "very solid position" with little sign of overheating.

That means the Fed should move toward a "neutral" policy stance, Bostic said, where the Fed is neither providing monetary stimulus through lower interest rates nor putting rates at a restrictive level.

"In my view, when the economy is doing well and standing on its own, then our policy should be neutral," Bostic said at a Chicago Council on Global Affairs event.

The Fed has penciled in two more rate hikes this year amid a growing economy, a 3.9% unemployment rate and inflation hovering around the central bank's 2% target.

Bostic said the risks to the Fed's outlook are "largely balanced," noting that businesses are facing significant uncertainty around trade policy. At the same time, the economy is getting a boost through an increase in federal government spending and tax cuts, he said, though he noted that the fiscal stimulus effects have not hit the economy "as robustly and as timely as I had expected."

Fed officials have been split on whether a flattening yield curve is sending alarm signals, given that inversions of short-term and long-term interest rates have historically signaled an upcoming recession.

Bostic has raised concerns over the issue in the past, saying the Fed must remain vigilant over the yield curve's flattening. At the Sept. 5 event, he said that while the yield curve's signal may be "less stark" today, its track record means he needs to take it seriously.

Earlier in the day, St. Louis Fed President James Bullard had said the Fed's current rate hike plan is "too hawkish for the current macroeconomic environment" and that the yield curve could invert some time this year or next.

Minneapolis Fed President Neel Kashkari highlighted similar concerns in an appearance in Montana. He also reiterated his view that there may still be room for the Fed to keep rates lower and help the labor market improve, noting that wage growth has yet to match pre-crisis levels.

"I've been saying, 'No, we're not there yet.' And I feel like so far, the fact that inflation has been very low and wage growth has been muted is evidence that we're not there yet," said Kashkari, who dissented on the Fed's three rate hikes when he voted on the FOMC in 2017.

Other Fed officials say the U.S. economy may have already surpassed the full employment mark and that the Fed should raise rates further to avoid an unhealthy rise in inflation.

Kashkari and Bullard are not voters on the FOMC this year.