February 13, 2019 / 3:05 PM / 8 days ago

Bostic: Fed must not inadvertently weaken economy

DUBLIN (Reuters) - The Federal Reserve should not move too fast and inadvertently weaken the U.S. economy at a time when companies are less certain about their prospects, Atlanta Fed President Raphael Bostic said on Wednesday.

FILE PHOTO: President and Chief Executive Officer of the Federal Reserve Bank of Atlanta Raphael W. Bostic speaks at a European Financial Forum event in Dublin, Ireland February 13, 2019. REUTERS/Clodagh Kilcoyne/File Photo

Early last month Bostic said the Fed should be patient about further interest rate rises until there is greater clarity on the economy’s performance, speaking before the Fed decided two weeks ago to scrap its promises of further gradual interest rate hikes and to be “patient” on further moves.

On Wednesday, Bostic said one interest rate increase remained his model projection, provided the U.S. economy grows by 2.5 percent this year.

“For me, I think it’s important that we don’t go too fast and act in a non-prudent way that lines up inadvertently restricting the economy and weakening the economy,” Bostic told a banking conference in Dublin.

“That nervousness (among businesses) has really informed my view of how we should think about it. It’s made me feel I don’t need to rush to get us into neutral, we can take our time to get to that point.”

Bostic is not a member of the Fed’s rate setting committee this year, but his urge for patience last month reflected a growing sense at the Fed that wild moves in financial markets, and concern among “real economy” executives, both needed to be taken seriously.

The Fed’s signal on Jan. 30 that its three-year drive to tighten monetary policy may be at an end came amid a suddenly cloudy outlook for the U.S. economy due to global headwinds and impasses over trade and government budget negotiations.

On external vulnerabilities to the outlook, Bostic cited trade uncertainty with China as a risk and described the slowdown in the Chinese economy, and to a lesser extent Europe, as “definitely significant.”

The United States and China are trying to resolve a festering trade dispute before a scheduled rise in U.S. tariffs on $200 billion worth of imports from China - to 25 percent from 10 percent - kicks in if the two sides cannot reach a deal by March 1.

Bostic said that the next round of tariffs would be “material” and that it was unclear how American consumers would respond to really feeling the impact of tariffs for the first time if they went through.

“The businesses I have talked to have told me that to date, the tariffs they have faced, they’ve basically absorbed but if this next round comes through, they’re not going to be able to do that,” he said.

“We know from a Federal Reserve survey that 40 percent of U.S. households could not manage a $400 (one-time) shock. In that context a 25 percent increase on basic goods is going to really reshape the household balance sheet.”

Reporting by Padraic Halpin and Graham Fahy; Editing by Alison Williams/Frances Kerry/Susan Fenton

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