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Raphael Bostic On Rate Cuts And The U.S. Economy

First On CNBC: CNBC Transcript: Atlanta Fed President Raphael Bostic Speaks with CNBC’s Steve Liesman Today

Raphael Bostic
Image source: CNBC Video Screenshot

WHEN: Today, Monday, May 20, 2019

WHERE: CNBC’s “Squawk Box” – Live from Amelia Island, Florida

The following is the unofficial transcript of a FIRST ON CNBC interview with Atlanta Fed President Raphael Bostic and CNBC’s Steve Liesman on CNBC’s “Squawk Box” (M-F 6AM – 9AM) today, Monday, May 20th, live from Amelia Island, Florida. The following is a link to video of the interview on CNBC.com:

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Atlanta Fed President Raphael Bostic: I do not expect an imminent rate cut

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BECKY QUICK: We are just a few weeks away from the Fed’s next meeting with no shortage of debate on whether the economy needs a rate cut or a rate increase. Whether we’re likely to get anything other than the Central Bank holding steady is another matter altogether. Let’s get out to Steve Liesman right now. He is joined by a very special guest with some very unique insight into those questions. Steve.

STEVE LIESMAN: Becky, thanks a lot. I’m joining you here from the Atlanta Fed’s conference in Amelia Island, Florida with President Raphael Bostic, President of the Atlanta Fed. Thanks for joining us.

RAPHAEL BOSTIC: It’s really good to be here. Thank you.

STEVE LIESMAN: I could do worse than start with Becky’s question. I think I’m going to follow her lead a lot. You know, the question in the market, is the next move a rate cut or a rate increase, and how will we know?

RAPHAEL BOSTIC: Well, I actually can’t tell you what that’s going to be. I mean, from my viewpoint, there are risks out there in the marketplace which would suggest the economy may perform worse than we’d expect, and in that case, it’d be a cut. But there are other risks that would suggest the economy might actually do better. Suppose that the trade negotiations end up in a way that is beneficial for the U.S. economy. We might see a lot of the uncertainty be viewed as going away, which could trigger a lot of investment and really heat up the economy quite quickly.

STEVE LIESMAN: Let’s go through that one point. That’s obviously a broad range of issues. But how does the idea that the trade problem could go away in a Tweet or some kind of deal that would be made change your ability or affect your ability to address it?

RAPHAEL BOSTIC: Well, let me walk you through this.

STEVE LIESMAN: Yeah.

RAPHAEL BOSTIC: It will affect, in my view, how businesses view their future potential.

STEVE LIESMAN: Right.

RAPHAEL BOSTIC: And when that becomes clear, then the trajectory of the economy will become clearer to us, which will then affect how we expect the economy or how I expect the economy to move forward, and then that will then, in turn, suggest what an appropriate course for policy might look like. And so right now, you know, when I go around, I talk to business leaders all the time, they tell me, ‘Well, I don’t know what the rules are going to be a year from now, so I’m just going to wait. And if things go one way, then there will be this course of action. If they go another way, then there will be a different course of action.’ And so, right now, I’ve got to just be open to the possibility that businesses can do either, and that has different implications for what the right course of policy would be.

STEVE LIESMAN: So, the message you’re hearing from businesses is this is putting a damper on investment?

RAPHAEL BOSTIC: For the long term, certainly. There are a lot of businesses that are standing on the sidelines just waiting to see how this resolves. And then once that happens, then capital will be deployed in ways that should increase productivity and production.

STEVE LIESMAN: Let’s talk about your base case. I know it’s hard to sort of say, ‘Well, if this doesn’t happen—' but if you said, what is the most likely outcome for the U.S. economy this year?

RAPHAEL BOSTIC: So, my base case is that the economy will continue to perform in a very solid way with solid growth. Last year the economy grew over 3%. My base case is that it’s going to grow less robustly than that. Sort of on a trend to get back to a long-term sustainable level, which in my model is about 2%, a little less than 2%. So, this year, 2.25% to 2.5% is something that I would expect to see happen. And in that space, you know, we should just let the economy do that.

STEVE LIESMAN: Okay, so a base case outcome requires no response either away from the Fed?

RAPHAEL BOSTIC: So, base case -- it depends, right? So, all of the -- I’m an economist, so it always depends.

STEVE LIESMAN: You need both hands and a few more. Right?

RAPHAEL BOSTIC: Exactly. But in general, my view is, as long as we don’t see inflation running away, that would be the sign that our policy is basically at a neutral level. We can sustain that for a long time and we don’t have to move. So, I’m really trying to keep an eye on what’s happening in terms of pricing pressures to see if there is evidence to suggest that we might be providing some extra stimulus in our policy position.

STEVE LIESMAN: Talk about inflation. I mean, one thing we heard was that the Chairman believes that the low inflation is potentially transient. How concerned are you about the Fed’s long-running inability to hit its 2% target?

RAPHAEL BOSTIC: So, I’m not super concerned about that today. And mainly it is because when you look at inflation expectations, they haven’t started to trail away in a significant way away from our target, which has been in the 1.8%, 1.9 range. Our target is 2%. If I started to see a trend moving down to 1.5 or 1.25% for inflation expectations, then I’d be concerned. But right now, I don’t view our lack of hitting that target exactly or even going a little bit above as being a material failure.

STEVE LIESMAN: I’ve got two more things I want to ask you about. First of all, the market seems substantially priced for a rate cut. I’m sure you watch the probabilities. 50% probability of September, up to 87% in January. Is the market offsides here relative to the Fed and your expectations?

RAPHAEL BOSTIC: Well, the market is ahead of where I am. So, I would say I’m not expecting a rate cut to be imminent, certainly not by September. Things would need to happen in order for that to play out. So, I’m just -- I’m taking a wait-and-see action. My view is that people should have an expectation, for my approach to this, that I’m open to moving either direction. And right now, I’m not really tilted to the cut side as opposed to the hike side.

STEVE LIESMAN: Do you worry that the market gets too far away from the Fed and the median expectation of the board?

RAPHAEL BOSTIC: So, I do worry a bit that there is a momentum in psychology, that sometimes the data doesn’t completely match, right? And so, I try to stay, as much as possible, grounded in the data that I see, in the information that I gather. And the information I’m gathering is not suggesting that we’re going to have significant weakness in the economy, which would really warrant a cut in our rate.

STEVE LIESMAN: When I look at your district, it’s every piece, everything that’s going on in America is in your district -- tech and banking and agriculture, trade, everything that’s going on. Give us an idea of how the district is doing relative to the U.S. economy.

RAPHAEL BOSTIC: Well, as you said, our district is a real microcosm of the U.S. economy. We’re one-sixth of the U.S. economy, and the distribution of sectors almost exactly mirrors the distribution of the country as a whole. So, we really do represent the country. And I will tell you that in my going around, businesses are confident, they’re excited, they’re pleased with how things are going. They’re not expecting it to grow as strong as it did last year, but they’re also -- I have not heard from anyone, the idea that there is a material weakness that’s happening. Consumers haven’t changed their approach to the economy in a material way. So, we’re just sailing along in the sixth district. And my hope and expectation is that we will continue to do that for the rest of 2019.

STEVE LIESMAN: President Bostic, thank you so much for joining us.

RAPHAEL BOSTIC: It’s really been good to be here.

STEVE LIESMAN: Appreciate it. Guys, back to you. From Amelia Island, Florida.