PALO ALTO, Calif. (Reuters) - The Federal Reserve should raise interest rates twice more this year, though upside potential from tax cuts and new government spending and a “rosy” economic outlook could require a bit more tightening, Atlanta Fed President Raphael Bostic said on Friday.
“I’m pretty firmly a three right now,” Bostic told Reuters in an interview on the sidelines of the Hoover Institution’s annual monetary policy conference, referring to the total number of rate hikes he expects the Fed to deliver this year. “I’m open to going either direction, going back to two (rate hikes) or going to four, depending on what the data show.”
The Fed, at the end of a policy-setting meeting earlier this week, signaled rising confidence in achieving the Fed’s 2-percent inflation target as labor markets continue to tighten.
Though policymakers left interest rates unchanged in a range between 1.50 percent and 1.75 percent at this week’s meeting, they are widely expected to pursue further gradual rate increases this year as they lift them to a more “neutral level,” estimated by most Fed policymakers at about 2.75 percent and by Bostic at about 2.5 percent.
Going into this year, Bostic had expected the economy could probably weather only two rate hikes. But he has since become more confident, he said Friday. Earlier Friday the government reported the U.S. unemployment rate dropped to 3.9 percent, a nearly 18-year low; inflation has by some measures reached the Fed’s target.
And it is not likely to stop there, Bostic suggested.
“You look at the way the economy is functioning and it is pretty rosy,” he said. “There’s still a lot of stimulus from the tax overhaul, the fiscal package is still feeling its way through the economy and so there’s a lot of upside potential that’s out there.”
He said he expects inflation to stay in the range of 2 percent over the mid-term.
But he said, it is important for the Fed to signal it has “some degrees of freedom that we are going to allow the economy to have: just because inflation goes a little above the 2 percent target doesn’t mean that we are going to panic or act in a dramatic way.”
Still, he said, “This is not a declare a victory type of moment; it’s really, we are aware, we are alert and we are willing to be flexible as the data takes us places.”
Reporting by Ann Saphir; Editing by Chizu Nomiyama