Waller and Bostic on the Outlook (16 Jan 2024, 18 Jan 2024)

Fed Governor Waller and Atlanta Fed President Bostic gave speeches on the economic outlook last week. They highlighted similar themes--the positive progress on inflation so far, the uncertainty surrounding economic forecasts, and the conditions under which rate cuts could begin this year. I read Waller to be somewhat more hawkish than Bostic.

In any case, everyone is waiting for the next PCE (the measure of inflation the Fed uses) data release to drop on Friday Jan 26.

My key takeaways below:

Federal Reserve Board Governor Waller

• Waller is increasingly confident that inflation is on a path to 2%, and sees the risks to the Fed's inflation mandate and its full employment mandate as being closely balanced. He believes policy is set properly, meaning he is unlikely to vote for hikes or cuts soon.
• Waller sees financial conditions as remaining restrictive, and expects that they will continue to have a drag on economic activity which will push down inflation. Indeed, he emphasized that 6- and 3-month measures of core inflation are showing a 2% annual inflation rate.
• As long as inflation doesn't rebound, Waller thinks the FOMC will be able to cut rates later in 2024, consistent with the median projection of 3 25 basis point cuts.
• As with other speakers, Waller emphasized that his view is dependent on what the economic data actually say. Backsliding on inflation, continued tightness in the labor market, or too-strong economic growth could all lead him to vote for keeping rates "restrictive."
• Waller is concerned about revisions to CPI data. He pointed out that when CPI data from a year ago showed a rapid fall in inflation, the data revisions showed that inflation had not fallen much.

Federal Reserve Bank of Atlanta President Bostic

• Bostic highlighted themes that I've seen in several other recent speeches--that the current level of interest rates is "restrictive," that uncertainty about the future path of the economy is very high, and he's ready to change course--cutting or hiking rates--depending on how the economic data unfold.
• Based on how GDP and inflation data have unfolded thus far, Bostic thinks that rate cuts could begin in Q3 of this year. He thinks the current level of rates will be enough to push inflation down to 2% over the "medium term."
• In his mind, the main question is how long rates should be kept at the current level before the FOMC starts to cut. Implicitly, he's saying that there isn't a justification for another rate hike, and the main risk is for the current policy stance to create too much of a slowdown.
• Bostic used the phrase "passive tightening"–the idea that as inflation falls, but rates hold steady, that means monetary policy is becoming more restrictive. He used an analogy of letting meat rest–you remove a turkey from the oven before it's fully cooked, as residual heat will continue to cook it even after you've taken it out of the oven.
• I read Bostic's view as marginally more dovish than Governor Waller and significantly more dovish than Dallas Fed President Logan.