The Federal Reserve building, in Washington, on May 4, 2021.Patrick Semansky/The Associated Press
U.S. Federal Reserve Governor Michelle Bowman said on Tuesday key measures of inflation remain “uncomfortably above” the Fed’s 2 per cent target, warranting caution as the Fed proceeds with cutting interest rates.
Bowman said she agreed that progress on lowering inflation since it peaked in 2022 means it is time for the Fed to reset monetary policy.
But she dissented to last week’s half-point rate reduction in favor of a more “measured” quarter-point cut because “the upside risks to inflation remain prominent,” including global supply chains at risk of strikes and other disruption, aggressive fiscal policy, and a chronic mismatch between housing supply and demand.
“The U.S. economy remains strong and core inflation remains uncomfortably above our 2 per cent target,” Bowman said in comments prepared for delivery at a Kentucky Bankers Association convention in Virginia.
“Core” inflation refers to the Personal Consumption Expenditures price index stripped of food and energy costs, which Fed officials consider a good guide to overall inflation trends and which Bowman said she expects was running still at around 2.6 per cent through August.
Inflation data for August will be released on Friday.
“I preferred a smaller initial cut in the policy rate while the U.S. economy remains strong and inflation remains a concern,” Bowman said. “I cannot rule out the risk that progress on inflation could continue to stall.”
After holding the benchmark rate of interest steady for 14 months in a range between 5.25 per cent and 5.5 per cent, the Fed last week in an 11 to 1 vote cut it to the 4.75 per cent to 5 per cent range.
Bowman’s dissent was the first by a member of the Fed’s Board of Governors since 2005.
While she said she was prepared to support further cuts if incoming data showed the job market weakening, she argued that wage growth and the fact that there were still more open jobs than available workers suggested the labor market remained strong overall.
“I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment,” with the unemployment rate at 4.2 per cent, she said.
She said she worried that fast rate cuts might also unleash “a considerable amount of pent-up demand and cash on the sidelines,” possibly fueling inflation again, while monetary policy may also not be as restrictive as some Fed officials believe.