Federal Reserve Governor Michelle Bowman, once a strong supporter of tight monetary policy, revealed on Monday a shift in her stance.
While previously advocating for interest rate hikes, Governor Bowman now suggests that such increases are probably at an end. Despite this change, she emphasized that she is not inclined to initiate rate cuts just yet.
During a private event in South Carolina, Bowman remarked on the advancements in combating inflation.
She emphasized the importance of maintaining the current short-term interest rates to sustain this progress.
Governor Bowman Shares Views on Inflation and Economic Policy
Reflecting on the progress, Governor Bowman expressed a shift in her perspective, considering the potential for a further decline in inflation if the current policy rate is maintained.
The inflation data from the last six months suggest that the Committee’s previous policy measures are achieving the desired outcome of aligning demand and supply more effectively.
The ongoing success in reducing inflation indicates a restrictive policy stance, with the latest 12-month total and core personal consumption expenditures inflation readings through November at 2.6 and 3.2 percent, respectively.
She suggested that if inflation moves closer to the 2 percent goal over time, it may eventually be fitting to initiate the process of lowering the policy rate to avoid undue policy restrictiveness.
Governor Bowman also emphasized that employment data, despite frequent revisions, consistently indicate a tight labor market with reports of robust job gains.
Although the average pace of job gains has slowed in the past year, it could signify a more balanced alignment between labor market supply and demand.
Despite the expected moderation in real gross domestic product from the third quarter of 2023, the economy has remained resilient.
However, Bowman asserted that, in her opinion, we have not reached that juncture yet. She highlighted the presence of significant inflation risks on the upside that need careful consideration.
Governor Bowman’s Policy Shifts to Potential Cuts in 2024
As a member of the rate-setting Federal Open Market Committee, Bowman holds a permanent voting position. Before this speech, she consistently expressed the belief that additional rate hikes would probably be necessary to tackle inflation.
These remarks follow the Federal Open Market Committee’s decision at its December meeting to maintain the benchmark federal funds rate within the 5.25%-5.5% target range.
Notably, the committee, as shown in their widely tracked dot-plot matrix, suggested the possibility of approximately three quarter-percentage-point rate cuts in the year 2024.
Fed’s Uncertain Path
Despite this, the minutes from the December 12-13 meeting, disclosed last week, offered no specific timeline for the rate reductions.
Committee members expressed a considerable level of uncertainty regarding the potential evolution of conditions.
Inflation is currently moving downward towards the Fed’s target, and by one measure, it has been running below the target over the past six months.
Bowman emphasized that policymakers will stay attentive to unfolding developments and are not committed to a rigid policy trajectory.
“I will adopt a cautious approach when contemplating future policy adjustments,” she stated, further adding that in the event of a reversal in inflation data, she remains open to the possibility of raising the federal funds rate in upcoming meetings.
The upcoming Federal Reserve meeting is scheduled for January 30-31, and market expectations suggest the committee will maintain current rates, potentially considering cuts in March.
Market pricing, as indicated by the CME Group’s FedWatch tracker, implies a total of 1.5 percentage points in reductions for the year, equivalent to six cuts.