U.S. Federal Reserve Governor Michelle Bowman attends a “Fed Listens” event at Federal Reserve Headquarters in Washington, DC on October 4, 2019.
Eric Baradat | AFP | Getty Images
Federal Reserve Governor Michelle Bowman said Tuesday that she thought her colleagues should have taken a more cautious approach to last week’s rate cut of half a percentage point because she worries that inflation could reignite.
Bowman was the only one to disagree with the Federal Open Market Committee’s decision to cut interest rates for the first time in more than four years. Since 2005, no governor has disagreed with an interest rate decision.
In explaining her rationale, Bowman said the cut of half a percentage point, or 50 basis points, poses some risks to the Fed’s twin goals of achieving low inflation and full employment.
The jumbo cut “could be interpreted as a premature declaration of victory over our price stability mandate. Achieving our mission to return to low and stable inflation at our 2 percent target is necessary to promote a strong labor market and an economy that works for everyone. in the longer term,” she said in a speech to a group of bankers in Kentucky.
Inflation by the Fed’s preferred measure is 2.5%, above the central bank’s target of 2%. Excluding food and energy, core inflation is 2.6%.
While Bowman favored a cut, she favored a Fed rate cut of a quarter of a percentage point, more in line with traditional central bank measures. The FOMC last cut rates by half a point in the early days of the Covid pandemic in March 2020, and before that the 2008 global financial crisis.
Bowman cited some specific concerns: that the big move would indicate Fed officials see “some vulnerability or greater downside risks to the economy”; that markets can expect a series of major cuts; that large amounts of side money can be put to work when interest rates fall, fueling inflation; and her general feeling that interest rates do not need to fall as much as her fellow policymakers have indicated.
“In light of these considerations, I believe that by moving at a measured pace towards a more neutral policy stance, we will be better positioned to make further progress in reducing inflation towards our 2 percent target, while we will keep a close eye on the development of the labor market. market conditions,” she said.
In recent statements, Fed officials have cited declining inflation and a weakening labor market as justification for the cuts. At last week’s meeting, individual policymakers indicated they expect another half percentage point in cuts this year and another full point in 2025. However, market prices are more aggressive, expecting a 2 full percentage point cut next year.
The Fed’s benchmark overnight rate is now targeted at 4.75%-5%.
Bowman said she respects the committee’s decision and emphasized that policy is not on a predetermined path and will depend on the data, which she said shows the labor market has softened somewhat but is still strong.
“I continue to see increased risks to price stability, especially with the labor market still close to full employment estimates,” she said.