Fed Watch: Bostic Delivers a Key Signal

Discussion

Starting circa minute 17 in the video below, FRB Atlanta President Raphael Bostic gave a detailed speech outlining the case for holding Fed Funds here and allowing what he views as a decisive disinflationary process underway to continue to play out. It’s a very good speech, outlining a host of key indicators the Fed is watching to monitor its progress on bringing economic supply and demand back into balance. But buried in the speech is a key signal: R* is going higher.

Bostic views the first 325-350 bps of rate hikes as “removing accommodation” - in other words, getting Fed Funds up to neutral. As indicated in the June FOMC SEP below, the current median R* estimate is 250. Since Bostic is on the dovish end of the FOMC, the fact he views R* as 325-350 is a big deal from a signaling perspective.

While it’s easy to get caught up in the market’s day trading of FED policy expectations, it’s critical to keep in mind the broader tightening project underway. As Danielle DiMartino Booth likes to say, the best word to describe Powell is “methodical”. This week’s JOLTS data did not change his stance for what the September SEP needs to deliver (i.e. “higher for longer”) perhaps one iota, let alone to the extent Wall Street expects rate cuts to begin in 1H24.

The September SEP is likely to show a higher R* (I think Bostic gave us the exact figure) and probably a YE24 Fed Funds of 500 bps, implying 2 cuts from 550 if they hike again this year, or just 1 cut from the current level.

It’s safe to say Wall Street doesn’t really want to find out what will get the Fed to cut in 1H24 as it currently expects.