by Howard Schneider

WASHINGTON (Reuters) – The U.S. economy is moving closer to normalizing inflation and unemployment, and the Federal Reserve needs to “normalize” monetary policy as well, Atlanta Federal Reserve President Raphael Bostic said on Monday, suggesting he is open to a rapid pace of interest rate cuts in the coming months.

“Progress on inflation and the cooling of the labor market has emerged much more quickly than I had imagined at the beginning of the summer,” Raphael Bostic said in comments prepared for delivery at the European Economics and Financial Centre.

“I now see monetary policy normalization sooner than I thought just a few months ago.”

“Normalizing” refers to returning the Fed’s key interest rate to a level that neither encourages nor discourages investment and spending. This level, called the “neutral” rate, is considered slightly lower than the 4.75% to 5% range set by the Fed last week.

Divergences over the level of this neutral rate are of little importance as long as rates remain so high, with balanced risks for inflation and the unemployment rate, currently at 4.2%, argues Raphael Bostic.

The policymaker said he supported the 50 basis point cut approved last week, saying it was a compromise between inflation, which remains half a percentage point above the Fed’s 2% target, home prices, which are still rising faster than expected, and the sense that the economy and labor market are slowing.

The Atlanta Fed president, who earlier this year expected a less aggressive pace of tapering and a later first rate cut, says last week’s big reduction “does not set a cadence for further moves” that will depend on future economic data.

“Inflation has fallen faster than I had expected, and the most recent data reinforce my conviction that the U.S. economy is indeed on the path to a sustainable return to price stability,” he said.

Companies have said their pricing power has “almost evaporated,” Bostic said, adding that some important recent measures of inflation have come in below the Fed’s target.

Companies are also taking a more cautious approach to hiring, although they don’t appear to be about to lay off workers yet, he said.

“We have made enough progress on inflation and the labor market has slowed enough that the time has come to change the direction of monetary policy to better reflect the most balanced risks,” argues Raphael Bostic.

(Written by Howard Schneider, Bertrand de Meyer, edited by Blandine Hénault)

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