Governor Michelle Bowman says there is a need to raise interest rates more. She suggests the FED may maintain higher rates for an extended period than expected to address inflation.
Despite recent improvements, inflation remains well above the 2% target. She mentioned that strong domestic spending and a tight labor market indicate the need for even higher rates.
Bowman expressed her remarks on Wednesday at Marrakech, Morocco. She said sustaining a restrictive policy rate might be necessary to align inflation with the FOMC’s goal.
On Wednesday, Bowman’s statements appeared less hawkish than her October 2nd remarks.
On October 2nd, Fed Governor Michelle Bowman expressed her readiness to advocate for an increase in the federal funds rate in future meetings if the data suggest that progress in addressing inflation has halted or is insufficient to achieve the 2% inflation target in a timely manner.
She noted then that despite significant advancements, inflation remains elevated. She anticipates that in these conditions, it will be necessary for the Federal Reserve to maintain higher rates.
Bowman refrained from expressing her outlook on the Federal Open Market Committee’s upcoming rate decision on November 1st.
Fed considers bond yields amid rate hike expectations
In the prior month, US central bankers maintained the benchmark lending rate at 5.25% to 5.5%, the highest in 22 years, and indicated anticipation of one more hike this year.
The Fed will publish the minutes of the September 19-20 meeting at 2 PM in Washington. Some Fed officials have suggested that an increase in long-term Treasury yields might reduce the necessity for additional rate hikes.
Futures market pricing reflects investors’ expectations of less than a 20% probability of another quarter-point increase at the next policymakers’ meeting.
When asked about the impact of the recent bond yield increase, Bowman mentioned it’s among several factors the central bank watches. She suggested that this development could be a cause for prudence in the central bank’s considerations.
Bowman highlights financial market concerns amid higher rates
“Financial markets have indeed shown signs of constriction,” she acknowledged, implying that some patience is warranted. This permits continued observation of economic and financial conditions as they develop at higher rates.
During her speech, Bowman cautioned that an increasing interest rate environment could weaken banks’ balance sheet credit quality.
In her remarks centered on financial stability risks, Bowman emphasized the need to vigilantly watch and, if required, mitigate these developing higher rates threats.
She stressed the importance of taking action to prevent potential ripple effects on the broader banking and financial system.
Bowman urges caution in regulatory changes amid higher rates
Bowman cautioned that alterations to the bank regulatory framework might result in unintended outcomes and introduce broader financial system risks, particularly in the context of higher rates.
She suggested policymakers should thoughtfully assess the efficiency and suitability of the presently contemplated higher capital requirements.
Bowman emphasized her vigilance regarding commercial real estate and non-bank sector risks. She called on US authorities to contemplate measures to enhance stability in the US Treasury market.
This includes reevaluating the leverage ratio and capital surcharge for the largest global banks operating in the US.
Strong jobs report impacts FED policy
Last Friday, the US Labor Department announced that employers had exceeded job addition expectations for September, also revising the previous month’s job gains upwardly.
Fed Governor Michelle Bowman, known for her hawkish stance, regarded the recent employment report as indicative of “solid” job growth.
She acknowledged that frequent and extensive data revisions have made forecasting the economy’s future trajectory more complex.
She also pointed out that downward revisions in earlier government reports had influenced her support for the Federal Reserve’s decision to maintain its benchmark higher rates within the 5.25%-5.50% range last month.