The Federal Reserve has stressed that it is waiting for inflation data to provide enough confidence that inflation is returning to the 2% target before initiating a rate cutting cycle. As markets have priced in three potential rate cuts, with the first predicted to arrive in June, Atlanta Federal Reserve President Raphael Bostic joins Yahoo Finance Fed reporter Jennifer Schonberger to share his perspective on the rate cut outlook and the economic landscape.

Bostic describes the US economy as "incredibly resilient," expressing particular gratitude for strength in the labor market. However, he acknowledges the possibility of an economic slowdown, though not as much as he had originally anticipated in January.

The Atlanta Fed president points to "volatility" in labor data, highlighting certain factors he is closely monitoring. Bostic will continue to analyze job growth on a sector-level basis, having observed disproportionate growth in government and healthcare. These sectors are "playing catch-up" from pandemic-induced lags, he says. Bostic also commented on the improving balance between labor supply and demand.

On the inflation front, Bostic expects "bumpiness" on the path to the 2% target in 2024. He cites evidence of inflation "stalling out a bit" in the first quarter and anticipates the services sector to remain "persistently higher" in terms of price pressures.

Bostic's current rate outlook remains at one cut, but he acknowledges two potential scenarios that could solidify or alter this view. If the economy accelerates, he will continue the "more patient" approach to rate cuts, but if the economy slows, he would be inclined to "pull in" his rate cut outlook to support the economy sooner. However, given current economic resilience, he suggests that "rate cuts may even have to move further out."

Bostic emphasizes that his outlook is not solely influenced by top-line inflation numbers, but by the broader distribution of price increases across various sectors. He studies the "totality of those measures" to determine whether inflation is normalizing towards the 2% target before feeling confident about initiating a rate cutting cycle.

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Editor's note: This article was written by Angel Smith

Video Transcript

JENNIFER SCHONBERGER: Investors only pricing in around two rate cuts this year on the back of stronger than expected economic data. That's down from the median of three cuts that Fed officials have penciled in. My next guest though only expects one rate cut this year and he doesn't expect it until the fourth quarter.

Joining me now in an exclusive interview is Atlanta Fed President Raphael Bostic. President Bostic, welcome back to the program. It's so great to have you.

RAPHAEL BOSTIC: Thank you. It's really good to see you as well, Jennifer.

JENNIFER SCHONBERGER: Great to see you as well, President Bostic. This economic data continues to come in strong none other than that jobs report on Friday. For the month of March, the Fed already lifting its outlook for growth this year. What is the prospect that we could see the outlook for growth upgraded again?

RAPHAEL BOSTIC: Well, you know, I think it's always possible. But let me just start by saying, look, the US economy has been incredibly resilient and it's been strong. And it's been strong for the better part of eight or nine months. ,

My outlook a year ago was that the economy would be slowing down and would not be performing at the level that it is, and that inflation would be coming down gradually but not nearly as strong as it has. So right now, I'm actually very grateful that the economy is producing a lot of jobs, that output is up, that wages are up. These are all good things and bode well for the economy.

Moving forward, my outlook is still that the economy will slow, but not nearly as much as I had anticipated, say, in January. And we'll just have to see how it goes, but for now this is all very good news.

JENNIFER SCHONBERGER: How are you viewing the job market now, especially in light of that stronger than expected jobs report on Friday, particularly wage growth? Do you think this economy can continue adding jobs at this pace without adding upward pressure to inflation?

RAPHAEL BOSTIC: Well, we'll have to see how this jobs report looks relative to the next several that happen. As you know, there's volatility in these numbers all the time and the last report was certainly a surprise to the upside. But there are a couple of things that I've been watching as we've been seeing and tracking employment over the last several months.

One is, which sectors are producing the jobs. And historically, job growth has been broad based. But over the last six to eight months, a disproportionate amount of job growth has happened in the governmental sector and in the health care sector. And these are two sectors that through the pandemic have been lagging their long-term average. So there is some catch up that's happening.

But I also have to acknowledge that the last couple of reports have been pretty broad based in terms of growth and we've been trying to figure out exactly what that means. I think one of the things that we have looked to is a robust response on the supply side. Workers are coming back into the economy, as well as a lot of the supply chains. They've, kind of, totally opened up and they're able to function in ways that allow the response to the elevated demand to be quite strong.

JENNIFER SCHONBERGER: Tomorrow, we're going to get CPI for the month of March. Expectations are for 3.7% on core year over year, 3/10 of a percent increase month over month. Looking at that year over year, that'd be down about a tenth of a percent from 3.8 in February and down from about 3.9 in both January and December. If that number were to come in line with expectations, how would you view that? Would it give you any encouragement that some of the hotter inflation prints that we saw in the first couple of months of this year were due more to seasonality?

RAPHAEL BOSTIC: Well, look, a number coming in where the financial participants expect would be a welcome development. It would suggest that inflation is continuing to move closer to our target and that's a good thing. I'll say for me, my outlook has always been that through this year, we would see some bumpiness in the trajectory of inflation. Certainly, my outlook has us moving closer to 2%, but not necessarily in a particularly fast way.

So the numbers coming in, as you suggest they might tomorrow, would be welcome. But it just says that we've got to keep watching and make sure that that pathway continues. Because there is some evidence to suggest in the first two months of this year that perhaps inflation's trajectory was stalling out a bit and wasn't moving as clearly to that 2% target. So a return to the more clear evidence of that would be a good thing. To me, I think it would still though be consistent with my outlook, which says that inflation is only going to come down at a very slow pace through the course of this year.

JENNIFER SCHONBERGER: To your point, you look at housing inflation, that's been slow to come down. We've seen evidence of that in CPI particularly. And inventory for housing is quite low. That's not expected to change anytime soon.

At the same time, we're discussing how strong the job market is. I wonder about services inflation. What is the risk that inflation could stall here or even reverse course?

RAPHAEL BOSTIC: Well, it's something that we're watching very closely. As you know, goods inflation has come down very fast and it's basically at pre-pandemic levels. But it's on the services side that we've seen the struggles in terms of inflation persistently being higher than it usually is.

Now, some of that is because salaries don't adjust on a month-to-month basis but rather year over year. But some of it is that demand for a lot of services is still quite high. We're just going to have to monitor this moving forward.

What I would say is that when I talk to my business contacts through the southeastern United States, what they're telling me is a story that gives me some confidence. One is that demand is starting to slow. It's not slowing rapidly, but it is moving in the right direction and one that's consistent with what I would expect if we're going to get to that 2% target over time.

A second is that they're pretty confident that they're going to be able to retain their labor force and they're not looking to lay off a lot of people. And that's quite positive as well. But the third thing that is quite important and relevant in this context is that most of them are feeling like they have less pricing power than they had, say, a year ago or 18 months ago. Their ability to pass through price increases, they tell me, is much weaker than it was before. And I think that is going to put some constraint on the degree to which inflation can start to move in that other direction.

Now, of course, that's what they've told me the last three or four months. I've got to make sure that that's what they continue to tell me as the next few months happen and we move into the summer where people start going on vacations and taking their trips. It'll be an important time and an important data point to keep track of.

JENNIFER SCHONBERGER: To your point, President Bostic, I mean, you've only penciled in one rate cut for this year. You don't see it happening until the fourth quarter. Given what you just mentioned, given the strength of the job market, what is the prospect of not cutting rates at all this year? How realistic of a scenario is that things get pushed back into 2025?

RAPHAEL BOSTIC: Well, you know, I actually think that the risks are somewhat balanced relative to where my outlook is. So that would say that the economy could accelerate in ways that mean that we have an ability to be more patient even than we are right now or the economy could slow. You know, I keep trying to remind myself that over the last six months of 2023, inflation moved far more robustly than I expected. And that possibility is still out there.

And if that declining-- that pace of decline resumes, it could be the case that I will view pulling forward my inflation outlook and my policy outlook so that we're cutting rates sooner may come to pass. Ultimately, it will just depend on what the data show, but I do think the risks are balanced. And given that the US economy has been so robust, and so strong, and so resilient, you can't take off the possibility that the rate cuts may even have to move further out.

JENNIFER SCHONBERGER: If you do pull forward your forecast, would that mean that you could see more than one rate cut on the table this year?

RAPHAEL BOSTIC: It's possible. Look, in the last SCP, our dot-plot submission, I had two cuts for this year because I had taken on board the rapid decline of inflation through the past-- through that last six months of 2023. What happened for me is that it slowed down and the pace went back to the pace that I had expected initially, which had me at one cut. So you know, I'm open to whatever the data tells us.

However the economy evolves, that will govern and guide what I think the appropriate path of policy is. And at this point, I think it's one. But as months pass, I may move to two or I might move to zero. And we'll just have to see where the chips fall.

JENNIFER SCHONBERGER: You mentioned earlier in the interview that if CPI were to come in with expectations, that would be welcome. How many more prints of CPI, PCE moving in that direction would you need to see to become fully confident that inflation is moving back to begin initiating those rate cuts?

RAPHAEL BOSTIC: So that's a really hard question to answer. I mean, on some level, it depends on the degree to which the numbers come in on point. Do they come stronger than expected or weaker than expected? And so it's really hard to know.

What I would say, though, is that in addition to the top line number, I'm actually looking at a number of other things as well. So as, you know, the top line number is sort of the average or aggregate of the changes in prices of all the goods in the basket. But what our team does in Atlanta is we also break it down and say, OK, if you go item by item in the basket, what share of the basket is showing price increases greater than 3% or price increases greater than 5%? Because if you have a lot of goods at 5%, it's hard to get to 2%.

And what we're seeing right now is that the distribution, if you look at the distribution of price increases, there are far many at the 5% level or higher than what we typically see in a normal time. And as long as that distribution is showing that latent price pressure, we're going to have to be mindful of that and pay attention. So I'm looking at a number of other things and I'll really want the totality of those measures to be telling me that we're getting back to a normalized level where 2% is likely to happen.

JENNIFER SCHONBERGER: Really quick before I let you go, President Bostic, on the other side of your mandate, the unemployment side. How high would unemployment need to go up assuming that inflation is, kind of, at these levels, maybe a little bit lower but not at your 2% target, for you to cut rates? Is there a certain level that the unemployment rate would need to rise to?

RAPHAEL BOSTIC: So you know, I don't have a certain level in mind on this. What I'm really trying to make sure is that we get to our 2% target with as little damage on the employment side as possible. And right now, I'm not hearing from businesses that they're expecting very much damage, if any at all, and that's quite comforting.

If I started to get different signals to suggest that there is a lot of coming pain in the labor market side, then I'd be open to changing our policy stance and perhaps cutting sooner. But it's hard to know exactly what number I would need to see. It would really be about, sort of, what I'm hearing and how I'm hearing business leaders across sectors and our geography feel about the labor market. And if it seems like there's a looming cliff that's coming, I'll definitely have to take that on board and thinking about when it is going to be appropriate to reduce rates.

JENNIFER SCHONBERGER: President Bostic, thank you so much for your insight so appreciate it. Let's not wait so long again to have you back.

RAPHAEL BOSTIC: I'll be looking for the invitation. It's been great to talk with you.

JENNIFER SCHONBERGER: Thanks so much. That's Raphael Bostic, president of the Atlanta Federal Reserve.