On October 4, 2019, Federal Reserve Board Governor Michelle Bowman attended the “Federal Reserve Listening” event held at the Federal Reserve headquarters in Washington, DC.
Eric Baradat | AFP | Getty Images
Federal Reserve Governor Michelle Bowman said on Tuesday she believed her colleagues should take a more cautious approach to last week’s half-percentage point rate cut because she was concerned that inflation could reignite.
Bowman was the lone dissenter to the Federal Open Market Committee’s decision to lower the benchmark interest rate for the first time in more than four years. Since 2005, no governor has opposed a rate decision.
Explaining his rationale, Bowman said a half-percentage point or 50-basis-point rate cut poses a number of risks to the Fed’s dual goals of low inflation and full employment.
This sharp rate cut “could be interpreted as a premature declaration of victory on our price stability mission. Accomplishing our mission to restore low and stable inflation with a 2 percent target is critical to fostering a strong labor market and delivering benefits to everyone.” The economy is necessary “for the long term,” she said in a speech to a bankers group in Kentucky.
The Fed’s preferred indicator of inflation is 2.5%, above the central bank’s 2% target. Excluding food and energy, core inflation was 2.6%.
While Bowman favors a rate cut, she prefers a quarter-percentage point cut from the Fed, which is more in line with the central bank’s traditional approach. The last time the Federal Open Market Committee cut interest rates by half a basis point was in March 2020 at the beginning of the COVID-19 pandemic, and preceded the 2008 global financial crisis.
Bowman listed several specific concerns: That a major move would signal that Fed officials see “some vulnerability or greater downside risks to the economy”; that markets may expect a series of steep cuts; that as interest rates fall, , a flood of sideline cash could be put to use, exacerbating inflation; she generally believes rates don’t need to fall as much as other policymakers have suggested.
“Given these factors, I believe that by taking a measured and more neutral policy stance, we will be better able to make further progress towards our goal of reducing inflation to 2%, while keeping a close eye on the evolution of the labor force. . Market conditions,” she said.
In recent statements, Fed officials cited slowing inflation and a weakening labor market as reasons for cutting interest rates. At last week’s meeting, individual policymakers said they expected another half-percentage point cut this year and another one-point cut in 2025.
The Fed’s benchmark overnight borrowing rate currently targets 4.75%-5%.
Bowman said she respects the committee’s decision and stressed that policy is not a preset course but depends on the data, which she said showed some softening in the labor market but remains strong.
“I continue to believe there are greater risks to price stability, especially as the labor market continues to approach full employment expectations,” she said.
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