More rate cuts could reignite inflation, hurt Fed credibility, Bostic says

WASHINGTON, Dec 16 (Reuters) - Further interest rate cuts could put U.S. monetary policy on an accommodative footing that stimulates economic growth and puts the country at risk of a new jump in inflation and inflation expectations, Atlanta Federal Reserve President Raphael Bostic said on Tuesday.

"Moving monetary policy near or into accommodative territory, which further federal funds rate cuts will do, risks exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers," Bostic wrote in an essay published by the Atlanta Fed. "That is not a risk I would choose to take right now."

Bostic agreed that the U.S. job market is weakening, but said he did not think it was heading towards a pronounced downturn. Some of what's taking shape, he said, may be the economy responding to structural shifts like the emergence of new technology, changes in immigration, or companies right-sizing payrolls after hoarding labor during the COVID-19 pandemic.

"Careful analysis by economists on our staff suggests that the labor market is likely not at a negative inflection point ... I do not view a severe labor market downturn as the most likely near-term outcome," Bostic said, with labor data "ambiguous" and largely "moving sideways."

Inflation, by contrast, seems stuck for now well above the Fed's 2% target, and unlikely to move down until perhaps late next year.

There is "little to suggest that price pressures will dissipate before mid- to late 2026, at the earliest," he said, with inflation likely to exceed 2.5% at the end of next year.

The situation, Bostic said, could put the Fed's credibility at risk, and make it harder to return inflation to the target.

"Will the public lose faith after five years of above-target inflation? Six years? Nobody knows," said Bostic, who is retiring at the end of February and is not currently a voting member of the central bank's Federal Open Market Committee. "But what we do know is that credibility is a cornerstone of effective monetary policy."

The Fed cut rates by a quarter of a percentage point last week, but signaled a likely pause before further reductions.

Bostic, in a later conversation with reporters, said he did not think the rate cut last week was warranted, and had penciled in no further reductions in borrowing costs for 2026, given his outlook that economic growth will rebound to around 2.5% and price pressures will remain elevated.

(Reporting by Howard Schneider; Editing by Paul Simao)