Atlanta Federal Reserve President Raphael Bostic – a voting member of the FOMC this year – took to the podium yesterday, delivering a dovish speech that makes clear he is open to the possibility of a less-than-expected path of rate hikes this year. Looks like a number of factors are playing into his analysis, the most interesting of which to me is a reduced expectation of the neutral level of interest rates. This is something to keep an eye on.

On net, Bostic comes down on the soft side of the Fed’s median GDP forecast for 2018. Whereas the median policymaker is looking for 2.5 percent growth, Bostic is comfortable with 2.2-2.5 percent. He does not anticipate much follow through from recent stronger growth numbers for three reasons. First, he is already looking for a first quarter slowdown attributed to seasonal effects. In other words, he thinks a portion of the last three quarters of strong growth is simply an offset for the first quarter (FWIW, I think he may be underestimating the underlying strength of the economy on this point). Second, he attributes some of the recent growth to the transitory impact of hurricane rebuilding (again, thinking this may be overplayed). Third, he reports survey and anecdotal evidence that firms are not expecting stronger growth. Nor does he anticipate a substantial boost from tax cuts, seeing more of an upside risk than anything else.

In my opinion, I would say there is a greater risk that Bostic’s forecast is overly pessimistic than optimistic. Same is true for his unemployment forecast. Bostic expects:

…Employment gains should remain substantial enough to keep the unemployment rate near its low level…

That suggests a fairly sharp slowdown in job growth given the Fed’s labor force growth forecast. That said, this disconnect between the economic forecast and unemployment forecast is consistent with that of his colleagues.

Bostic anticipates inflation returning to target by the end of this year, but he eyes inflation expectations warily. The situation calls for caution:

…Survey evidence—as well as estimates about the expectations gleaned from financial market prices—indicates that individuals may not be completely convinced about the symmetry of the FOMC’s inflation objective. This possibility is one factor that might argue for being somewhat more patient in raising rates, even as the inflation rate moves toward the 2 percent objective…

Altogether, he expects further interest rate hikes, but maybe not as many as anticipated:

…Should the recent data unfold in a manner similar to my outlook, I am comfortable continuing with a slow removal of policy accommodation. However, I would caution that that doesn’t necessarily mean as many as three or four moves per year…

This is somewhat interesting phrasing is that it appears his baseline was another three to four hikes this year, a bit more hawkish than the median policymaker projection of three hikes. Why might actual policy fall short? Bostic is watching the neutral rate:

…Recent evidence suggests that the interest rate that would prevail when GDP and inflation are back on target could be close to 2 percent at the moment, and may rise only modestly over the medium term.

If this is right, then the current stance of monetary policy is still somewhat accommodative but is approaching a more neutral stance. Finally, it is important to remember that the Fed is also removing accommodation by shrinking its balance sheet…

Now he sees policy as possibly just “somewhat accommodative.” He saw the world differently two months ago. In a November speech, Bostic said:

Under my baseline scenario, I think it will be appropriate for interest rates to rise gradually over the next couple of years, as our policy position is still very accommodating rather than neutral.

Did one rate hike in the intervening time take policy from “very accommodating” to “somewhat accommodative”? Doubtful. This seems to reflect more of shift in Bostic’s view of the neutral rate, following in the footsteps of Federal Reserve Governor Lael Brainard.

Bottom Line: Bostic looks to be leaning dovish, more so due to a changing view of the neutral rate than to his economic outlook. Watch to see if more of his colleagues move in this direction. My sense is that it would only take a few stronger inflation readings for Bostic to back off on this line of thought. I also wonder that the consensus central banker would have an easy time reconciling the idea that policy is close to neutral when financial conditions appear to have only eased since the Fed began tightening. Altogether, this is clearly a space to keep an eye on.