Fed's Bostic sees higher prices into '22, then higher interest rates

BY Reuters | ECONOMIC | 10/21/21 04:38 PM EDT

By Ann Saphir

Oct 21 (Reuters) - Supply chain disruptions and labor market constraints, coupled with strong consumer demand, could keep inflation high into 2022, Atlanta Federal Reserve Bank President Raphael Bostic said on Thursday.

Once those issues get resolved, labor markets will heal and the Fed will be able to start raising interest rates, he added.

"I was thinking late third, maybe early 4th quarter for 2022," Bostic said in a CNBC interview, when asked when he had penciled in an interest rate hike. By then, he said, the U.S. economy will be back to full employment.

His view is broadly in line with the price scene evolving in rate futures markets, where the CME's FedWatch interpretive tool suggests the probability of a first rate hike exceeds 50% as early as next June, but grows to more than 80% by the Fed's September 2022 meeting.

"A lot of this has to do with my confidence in the U.S. economy, my confidence in the labor markets responding to this demand, and us getting to a very positive place within the year," he said.

The Fed is expected to take the first step toward withdrawing its support for the economy next month by announcing a plan to trim back its $120 billion in monthly asset purchases. Fed Chair Jerome Powell has signaled his expectation that by mid-2022 the Fed will no longer be adding new policy accommodation.

Once the Fed has begun to taper, Bostic said, it will assess the economic and financial markets impact and weigh incoming data to determine when it needs to raise interest rates. About half of Fed officials believe no rate hikes will be needed until 2023.

But some Fed officials feel that rising inflation could speed up that time frame.

"It's becoming clearer and clearer that this is going to last into 2022," Bostic said of rising inflation pressures. "Part of the ultimate answer to how long this will take will be how quickly we resolve some of the coronavirus issues as well as some of the supply chain challenges that are happening at a global level."

"Demand remains very strong," he added, so if the supply and labor constraints can get resolved, "I think there's a lot of space for the economy to grow."

(Reporting by Ann Saphir; Editing by Andrea Ricci and Edward Tobin)

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