Making Monetary Policy amid Financial System Challenges
By Raphael Bostic, President and Chief Executive Officer
June 21, 2023
Inflation remains too high, and the Federal Open Market Committee (FOMC) is firmly committed to bringing it down to our 2 percent objective.
But the pursuit of price stability, never easy, has become even more complicated by turmoil in the banking system earlier this year. A few high-profile bank failures and difficulties at certain other institutions raised fears that liquidity concerns could spread throughout the banking system and create financial instability. In response to those concerns and slowing economic activity, many lending institutions have tightened credit standards—they've become choosier in deciding whether to lend money to prospective borrowers.
It is important to note that widespread credit tightening does not constitute financial instability. Instability in the financial system means markets are shutting down, bank runs are ongoing, and capital is not flowing where it is needed to fuel economic activity. We are not at that precarious place. The contagion we feared might emanate from the turmoil that surfaced in March has so far not materialized. The banking system has not been shaken and institutions in our district by and large report solid liquidity and capital positions.
Should conditions worsen and financial instability concerns increase, the Federal Reserve maintains tools, including the Bank Term Funding Program, to blunt the likelihood of bank runs and ensure that households and businesses can get the financial support they need from their banks.
Tighter bank lending standards, in fact, are a byproduct of restrictive monetary policy. This is how it's supposed to work. The financial system that distributes capital to businesses and households is the primary means through which Fed policy affects the real economy. Economists call this the "policy transmission channel." Basically, the Committee raises the federal funds rate, which is the rate banks charge one another for overnight loans from their reserves held at the Fed. In turn, that higher rate filters through to higher rates on consumer and business loans, eventually slowing economic activity to bring down inflation.
So, tougher bank lending standards are a powerful mechanism that can bring supply and demand across the macroeconomy into balance by cooling demand. Narrowing the gap between (low) supply and (higher) demand is the fundamental factor that reduces inflation.
A look at what we've done
The FOMC has already done plenty. Since March 2022, the Committee has increased the federal funds rate by a total of 5 percentage points, from a range of 0 to 0.25 percent to a range of 5 to 5.25 percent. That is a rapid pace of policy tightening, and it was frontloaded. That is, we started with bigger increases of 75 basis points before shifting to smaller hikes, an appropriate course given the surge in inflation that began in the spring of 2021 and proved more persistent than the Committee first expected.
Here, let me clarify that the first several rate hikes did not move policy into truly restrictive territory. The policy rate had been at zero for about two years, which is the equivalent of flooring the gas pedal such that our policy gave the maximum push to the economy. So you can think of the first several rate increases as the Fed taking its foot off the gas. More recent hikes have made policy restrictive—here the Committee is applying the brakes. I like to separate the hikes and think about the first 325 to 350 basis points of increases as removing accommodation and then the subsequent 150 to 175 basis points as moving policy into restrictive territory.
That means policy has been restrictive for only eight to nine months. Therefore, the real economic effects of tighter monetary policy are only just beginning to take hold. We know that with a fair degree of certainty. What we don't know is exactly how responsive our brakes are, how quickly policy will bite more deeply and in turn how quickly inflation will fall. I expect it will continue to come down gradually, with bumps along the way.
How do we know policy tightening is at least starting to take hold? Though the labor market remains strong, hiring and the number of job vacancies have declined from supercharged levels. Housing markets and manufacturing have shown signs of slowing. As noted, banks are toughening lending standards. Most importantly, inflation continues its steady decline, from around 4 percent, as measured by the Fed's preferred gauge, the Personal Consumption Expenditures price index. Importantly, the breadth of price increases has narrowed. The latest Consumer Price Index reports show that less than half of all prices rose more than 5 percent, well off the peak when nearly 80 percent of the index climbed that much. Finally, business contacts in the Sixth District tell me their power to raise prices is eroding.
Still, inflation is roughly double the FOMC objective of 2 percent, so there is still a ways to go.
The current and future stance of monetary policy
As always, the task of policy is to manage risks. That is especially true amid risks that cut in various directions—a possible rise in unemployment and a severe economic slowdown, further stresses on banks, unforeseen geopolitical events, and the chance that inflation takes longer than we'd like to decline to 2 percent.
In terms of an appropriate policy stance in this environment, I see three viewpoints to choose from.
There are reasonable arguments for each approach. For now, though, I am in the second camp.
I think we are in a place where we should let the hard work the Committee has already done work its way through the economy and see if it continues to bring inflation closer to our goal. Letting restrictive policy work for a while is prudent because the policy has been truly restrictive for less than a year, and it takes time for monetary policy changes to meaningfully influence economic activity. We have good reasons to expect our policy tightening will be increasingly effective in coming months, which would accelerate progress to that end.
I continue to believe we can subdue inflation without severe economic dislocation. In part, that's because the labor market remains strong. The job market has cooled, moving nearer to a place consistent with lower inflation, mainly because of a reduction in the number of job openings without a meaningful rise in the unemployment rate. If we simply press on with additional rate hikes, we could needlessly drain too much momentum from the economy.
Also, I must emphasize that waiting is not the same thing as inaction. If inflation continues to fall in coming months, our current policy stance effectively becomes tighter, as the real interest rate—which is the difference between our rate and the rate of inflation—will increase. I think of this dynamic as "passive tightening," and it should help us continue on the path to our target if recent inflation trends persist.
The clearest risk in pausing is that we give inflation a chance to rekindle, even as the economy might slow and labor markets deteriorate. That is not my baseline forecast. But we cannot forecast with certainty, so if down the road we find our twin mandates of maximum employment and price stability in conflict, then the discussion necessarily turns to our policy framework and underlying principles. As of now, price stability clearly remains the pressing priority, and that seems unlikely to change soon.
To be sure, some further slowing in the labor market will probably be necessary to reach the 2 percent inflation objective. Yet even if we see an uptick in unemployment, the case for staying resolute in pursuit of price stability is compelling. History shows that if we recede from the inflation battle prematurely and allow price increases to go unchecked, that will threaten inclusive prosperity for many years to come.
Bottom line: We will bring inflation down to 2 percent. Price stability is a necessary precondition for sustained maximum employment and long-run, inclusive economic expansion. The monetary policy work goes on, and we will continue to pursue it in service to the American public.
Dr. Raphael W. Bostic took office June 5, 2017, as the 15th president and chief executive officer of the Federal Reserve Bank of Atlanta. He is responsible for all the Bank's activities, including monetary policy, bank supervision and regulation, and payment services. He serves on the Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System.
From 2012 to 2017, Bostic was the Judith and John Bedrosian Chair in Governance and the Public Enterprise at the Sol Price School of Public Policy at the University of Southern California (USC).
He arrived at USC in 2001 and served as a professor in the School of Policy, Planning, and Development. His research has spanned many fields, including home ownership, housing finance, neighborhood change, and the role of institutions in shaping policy effectiveness. He was director of USC's master of real estate development degree program and was the founding director of the Casden Real Estate Economics Forecast.
Bostic also served USC's Lusk Center for Real Estate as the interim associate director from 2007 to 2009 and as the interim director from 2015 to 2016. From 2016 to 2017, he was the chair of the center's Governance, Management, and Policy Process Department.
From 2009 to 2012, Bostic was the assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development (HUD). In that role, he was a principal adviser to the secretary on policy and research, helping the secretary and other principal staff make informed decisions on HUD policies and programs, as well as on budget and legislative proposals.
Bostic worked at the Federal Reserve Board of Governors from 1995 to 2001, first as an economist and then as a senior economist in the monetary and financial studies section, where his work on the Community Reinvestment Act earned him a special achievement award.
He serves on many boards and advisory committees, including the Advisory Committee on Economic Inclusion at the Federal Deposit Insurance Corporation and Georgia's Partnership for Inclusive Innovation. He is also a member of Harvard University's Board of Overseers. He is serving as the 2021–22 chair of the board of directors of the United Way of Greater Atlanta and is the 2022 chair for the Metro Atlanta Chamber of Commerce.
Bostic graduated from Harvard University in 1987 with a combined major in economics and psychology. He earned his doctorate in economics from Stanford University in 1995.
The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which covers Alabama, Florida, and Georgia, and parts of Louisiana, Mississippi, and Tennessee. The Bank has branches in Birmingham, Jacksonville, Miami, Nashville, and New Orleans.Updated May 2022
Bostic, Raphael W. April 18, 2020. "Opinion: Fed's Working to Aid Economy, Post-Pandemic Recovery." Atlanta Journal-Constitution.
Bostic, R. and Johnson, M. January 15, 2020. "BankThink: How to keep community banks thriving." American Banker.
Boarnet, M. G.; Bostic, R. W.; Rodnyansky, S.; Burinskiy, E.; Eisenlohr, A.; Jamme, H.; and Santiago-Bartolomei, R. 2020. "Do High Income Households Reduce Driving More When Living near Rail Transit?" Transportation Research Part D: Transport and Environment 80.
Bostic, R. W.; Jakabovics, A.; Voith, R.; and Zielenbach, S. 2019. "Mixed-Income LIHTC Developments in Chicago: A First Look at Their Income Characteristics and Spillover Impacts." In What Works to Promote Inclusive, Equitable Mixed-Income Communities, edited by Mark L. Joseph and Amy T. Khare, cluster #1, section A, no. 6.
Boarnet, M. G.; Bostic, R. W.; Burinskiy, E.; Rodnyansky, S.; and Prohofsky, A. 2018. "Gentrification near Rail Transit Areas: A Micro-Data Analysis of Moves into Los Angeles Metro Rail Station Areas." Research Reports, University of California National Center for Sustainable Transportation.
Bostic, R. W. and Molaison, D. Forthcoming. "Hurricane Katrina: Devastation, Possibilities and Prospects." In Economic and Risk Assessment of Hurricane Katrina, University of Southern California Center for Risk and Economic Analysis of Terrorism Events.
Bostic, R.; Kim, A.; and Valenzuela, A. 2016. "An Introduction to the Special Issue: Contesting the Streets 2: Vending and Public Space in Global Cities." Cityscape 18(1): 3–10.
Bostic, R. W. and Ellen, I. G. 2014. "Introduction: Special Issue on Housing Policy in the United States." Journal of Housing Economics 24: 1–3.
Bostic, R. 2014. "CDBG at 40: Opportunities and Obstacles." Housing Policy Debate 24(1): 297–302. doi:10.1080/10511482.2013.866973.
Bostic, R. W. 2014. "Resilient Economic Development: Challenges and Opportunities." In University of Illinois Chicago Urban Forum, edited by M. Pagano. University of Illinois Press.
Bostic, R. W. and McFarlane, A. 2013. "The Proposed Affirmatively Furthering Fair Housing Regulatory Impact Analysis." Cityscape: A Journal of Policy Development and Research 15(3): 257.
Bostic, R. W.; Thornton, R. L.; Rudd, E. C.; and Sternthal, M. J. 2012. "Health in All Policies: The Role of the U.S. Department of Housing and Urban Development and Present and Future Challenges." Health Affairs 31(9): online.
Graddy, E., with Bostic, R. W. 2010. "The Role of Private Agents in Affordable Housing Policy." Journal of Public Administration Research and Theory 20, special issue: 81–99.
Bostic, R.; Gabriel, S.; and Painter, G. 2009. "Housing Wealth, Financial Wealth, and Consumption: New Evidence from Micro Data." Regional Science and Urban Economics 39(1): 79–89.
Bostic, R. W., with Engel, K.; McCoy, P.; A. Pennington-Cross; and Wachter, S. 2008. "State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms." Journal of Economics and Business 60(1–2): 47–66.
An, X. and Bostic, R. W. 2008. "GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals." Journal of Real Estate Finance and Economics 36(2): 207–31.
An, X.; Bostic, R. W.; Deng, Y.; and Gabriel, S. 2007. "GSE Loan Purchases, the FHA, and Housing Outcomes in Targeted, Low-Income Neighborhoods." In Brookings-Wharton Papers on Urban Affairs, edited by G. Burtless and J.R. Pack. Brookings Institute Press.
Sloane, D. C., with Bostic, R. W. and Lewis, L. B. 2007. "The Neighborhood Dynamics of Hospitals as Land Owners." Lincoln Land Institute publication.
Bostic, R. W., with Longhofer, S. D. and Redfearn, C. 2007. "Land Leverage: Decomposing Home Price Dynamics." Real Estate Economics 35 (2): 183–208.
Bostic, R. W. and Prohofsky, A. 2006. "Enterprise Zones and Individual Welfare: A Case Study of California." Journal of Regional Science 46 (2): 175–203.
Bostic, R. W. and Gabriel, S. A. 2006. "Do the GSEs Matter to Low-Income Housing Markets? An Assessment of the Effects of GSE Loan Purchase Activity on California Housing Outcomes." Journal of Urban Economics 59: 458–75.
Black, H.; Bostic, R. W.; Robinson, B.; and Schweitzer, R. 2005. "Do CRA-Related Events Affect Shareholder Wealth? The Case of Bank Mergers." The Financial Review 40(4): 575–86.
Bostic, R. W. with Robinson, B. 2004. "Community Banking and Mortgage Credit Availability: The Impact of CRA Agreements." Journal of Banking and Finance 28: 3069–95.
Bostic, R. W., with Calem. P. S. and Wachter, S. M. 2004. "Hitting the Wall: Credit as an Impediment to Homeownership." In Building Assets, Building Credit: Creating Wealth in Low-Income Communities, edited by N. Retsinas and E. Belsky. Joint Center for Housing Studies and Brookings Institution Press.
Bostic, R. W., with Redfearn, C. 2004. "Book Review [The Color of Credit: Mortgage Discrimination, Research Methodology and Fair Lending Enforcement, by Stephen L. Ross and John Yinger]." Journal of Regional Science 44(1):162–65.
Bostic, R. W., with Aaronson, D.; Huck, P.; and Townsend, R. 2004. "Supplier Relationships and Small Business Use of Trade Credit." Journal of Urban Economics 55(1): 46–67.
Bostic, R. W., with Barakova, I.; Calem, P.; and Wachter, S. 2003. "Does Credit Quality Matter for Homeownership?" Journal of Housing Economics 12(4): 318–36.
Bostic, R. W. 2003. "A Test of Cultural Affinity in Home Mortgage Lending." Journal of Financial Services Research 23(2): 89–112.
Bostic, R., with Robinson, B. 2003. "Do CRA Agreements Increase Lending?" Real Estate Economics 31(1): 23–51.
Bostic, R. W., with Calem, P. S. 2003. "Privacy Restrictions and the Use of Data at Credit Repositories." In Credit Reporting Systems and the International Economy, edited by Margaret J. Miller. Boston: MIT Press.
Bostic, R. W., with Martin, R. 2003. "Black Homeowners as Gentrifying Force? Neighborhood Dynamics in the Context of Minority Homeownership." Urban Studies 40(12).
Bostic, R. W. 2002. "Equal Access to Credit." In 25 Years of Credit Research, edited by Mike Staten. Washington, DC: Georgetown University Press.
Bostic, R., with Canner, G. B. 2000. "Consolidation in Banking: How Recent Changes Have Affected the Provision of Banking Services." The Neighborworks Journal.
Bostic, R., with Avery, R. B. and Canner, G. B. 2000. "Highlights of a Survey of the Performance and Profitability of CRA-Related Lending." Housing America Update.
Bostic, R., with Avery, R. B. and Canner, G. B. 2000. "CRA Special Lending Programs." Federal Reserve Bulletin 86: 711–31.
Bostic, R., with Avery, R. B.; Calem, P. S.; and Canner, G. B. 2000. "Credit Scoring: Statistical Issues and Evidence from Credit Bureau Files." Real Estate Economics 28: 523–47.
Bostic, R., with Canner, G. B. 1998. "New Information on Small Business and Small Farm Lending: The 1996 CRA Data." Federal Reserve Bulletin 84(1): 1–21.Bostic, R., with Avery, R. B. and Samolyk, K. A. 1998. "The Role of Personal Wealth in Small Business Finance." Journal of Banking and Finance 22: 1019–61
Bostic, R.; Bower, S.; Shy, O.; Wall, L.; and Washington, J. September 2020. "Digital Payments and the Path to Financial Inclusion." Promoting Safer Payments Innovation Series no. 20-1.
Raphael Bostic. "Quantitative Frightening?" macroblog. January 16, 2019.
Raphael Bostic. "What Does the Current Slope of the Yield Curve Tell Us?," macroblog. August 23, 2018.
Raphael Bostic. "Thoughts on a Long-Run Monetary Policy Framework" macroblog series:
"Framing the Question." March 26, 2018.
"Part 2: The Principle of Bounded Nominal Uncertainty." March 27, 2018.
"Part 3: An Example of Flexible Price-Level Targeting." March 28, 2018.
"Part 4: Flexible Price-Level Targeting in the Big Picture." April 2, 2018.
Raphael Bostic. "A Big-Picture Look at the Economy. " ECONversations. February 21, 2018.
Raphael Bostic (interviewer) and Anthony Orlando. "'These Local Problems Do Have Some National Solutions': A Conversation about Inequality." February 27, 2020.
Raphael Bostic (interviewer) and James Fallows. "Wings over America: A Conversation with Author James Fallows." . January 2, 2020.
Raphael Bostic (interviewer) and Alessandro Acquisti. "Speaking Publicly on Privacy: A Conversation about Digital Privacy." April 2, 2019.
Raphael Bostic (interviewer) and Jerome Adams. "Health Is Wealth": A Conversation with the U.S. Surgeon General." January 3, 2019.
Raphael Bostic (interviewer) and Raj Chetty. "'A Kid Should Have a Fair Shot': A Discussion of Economic Mobility." October 22, 2018.
Raphael Bostic (interviewer) and David Lusk. "'It's a Really Dramatic Change': A Discussion of the Economics of Food." October 12, 2018.
Raphael Bostic. "'It's a Special Job': A Conversation with Atlanta Fed President Raphael Bostic." April 27, 2018.
Raphael Bostic. "Making Monetary Policy amid Financial System Challenges." June 21, 2023.
Raphael Bostic. "Striking a Delicate Balance in Making Policy." March 1, 2023.
Raphael Bostic. "On Long and Variable Lags in Monetary Policy." November 15, 2022.
Raphael Bostic. "Risk Management Is Key to Monetary Policy in Uncertain Times." August 30, 2022.
Raphael Bostic. "Monetary Policy amid Changing Labor Market Dynamics." May 24, 2022.
Raphael Bostic. "Observe and Adapt: Appropriate Monetary Policy in the Face of Inflation." February 1, 2022.
Raphael Bostic. "Defining the Pursuit of Maximum Employment." September 27, 2021.
Raphael Bostic. "A Moral and Economic Imperative to End Racism." June 12, 2020.
Raphael Bostic. "A Message from Federal Reserve Bank of Atlanta President Raphael Bostic." March 17, 2020.