Raphael Bostic said a neutral policy rate may be 0.25 to 0.50 percentage points below the current Fed policy rate. He added that the Fed may need to consider rate increases if inflation rises more than expected.
He forecast GDP growth of 2.4% in 2026 and 2.1% in 2027. He said growth would return to its trend pace in 2028.
Neutral Rate Implications
He said more fiscal stimulus is likely and would boost the economy. He also said it could add to inflation pressure.
He noted that the latest PCE inflation reading is still well above the 2% target. He said that if inflation moves “the wrong way” and starts rising, the Fed would need to consider raising rates.
He said a Supreme Court ruling could create uncertainty about whether new supply and pricing standards stay in place or change. He also questioned whether the administration can impose the same tariffs through other methods, or whether it is constrained.
With the Fed’s policy rate now at 4.75%, these comments suggest there is little room for near-term rate cuts. This directly challenges market pricing, which has been expecting at least two cuts by year-end. The change in tone also suggests a more hawkish stance is possible.
Market Positioning Implications
The inflation data supports this caution. The January 2026 Core PCE report was hotter than expected at 3.1%, up from 2.9% at the end of 2025. This breaks the earlier disinflation trend and supports the risk that prices could move the “wrong way.” With GDP growth expected to be a solid 2.4% this year, inflation pressure may not cool as quickly as markets hoped.
For interest-rate traders, the balance of risk now points to rates staying higher for longer, or even moving higher. Selling SOFR futures for late 2026 delivery could be a sensible approach. This trade benefits if the market reduces expectations for future rate cuts.
In equities, this message is a reason to consider protection against higher volatility. The VIX has been around 14, a low level that suggests complacency similar to late 2025, before a sharp correction. Buying VIX call options or S&P 500 put options is a relatively low-cost way to hedge against a market shock.
This tone also supports the US dollar, especially as other major central banks remain more dovish. The dollar weakened in the second half of 2025 as markets priced in aggressive Fed cuts. If those expectations reverse, it may be worth considering long USD positions against currencies like the euro or the yen.
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