Federal Reserve Governor Open to Rate Hikes If Inflation Persists

Federal Reserve Governor Michelle Bowman attends an event in Washington, on Oct. 4, 2019. Eric Baradat/AFP/Getty Images

Federal Reserve Gov. Michelle Bowman said at a London event on June 25 that she is prepared to raise interest rates if inflation pressures persist.

Speaking to the British conservative think tank Policy Exchange, Ms. Bowman conceded that she would be willing to increase the benchmark federal funds rate “should progress on inflation stall or even reserve.”

“Given the risks and uncertainties regarding my economic outlook, I will remain cautious in my approach to considering future changes in the stance of policy,” the Fed official noted.

The policy rate range presently stands at a 23-year high of 5.25 percent and 5.5 percent.

While it would eventually become appropriate to pull the trigger on a rate cut if inflation is shifting sustainably toward the central bank’s 2 percent target, she does not believe the time has come.

“We are still not yet at the point where it is appropriate to lower the policy rate,” Ms. Bowman stated.

The Fed official told the audience that she has not been swayed by the rate cuts employed by the Bank of Canada or the European Central Bank (ECB). She reasoned that the U.S. economy could diverge from other advanced markets.

“In contrast to the past two years, it is possible over the coming months that the path of monetary policy in the U.S. will diverge from that of other advanced economies,” Ms. Bowman stated.

“Inflation and labor market developments in the U.S. have unfolded differently in recent quarters compared to many other advanced economies, likely reflecting a more open immigration policy and significantly larger discretionary fiscal stimulus since the pandemic.”

Both central banks recently reduced interest rates by a quarter point. So far this year, the Swiss National Bank has trimmed its policy rate twice.

The futures market is penciling in one or two rate cuts this year, potentially starting at the Fed’s September meeting, according to the CME FedWatch Tool.

The updated Summary of Economic Projections in June revealed that monetary policymakers anticipate just one 25-basis-point rate cut, lowering the median policy rate to 5.1 percent. In March, the Fed predicted three rate cuts and a year-end median policy rate of 4.6 percent.

Investors might enhance or ease their rate-cut forecasts later this week as the Bureau of Economic Analysis will release the Fed’s preferred personal consumption expenditure (PCE) price index for May. The consensus estimate suggests the PCE price index and core PCE, which strips the volatile food and energy components, will both ease to 2.6 percent.

What Other Fed Officials Are Saying

Since the June policy meeting, monetary authorities have been making a dovish case for lowering interest rates.

Minneapolis Fed president Neel Kashkari told CBS' “Face the Nation” on June 16 that it is a “reasonable prediction” that the first and only rate cut of 2024 will happen in December.

“We’re in a very good position right now to take our time, get more inflation data, get more data on the economy, on the labor market, before we have to make any decisions,” Mr. Kashkari said. “We’re in a strong position, but if you just said there’s going to be one cut, which is what the median indicated, that would likely be toward the end of the year.”

Minneapolis Federal Reserve president Neel Kashkari visits FOX Studios in New York on Feb. 17, 2016. D Dipasupil/Getty Images

In a speech at the Peterson Institute for International Economics on June 18, Fed Gov. Adriana Kugler admitted she is optimistic that a rate cut later this year would be appropriate.

Ms. Kugler cited the worse-than-expected May retail sales as further data supporting a rate cut.

“Output growth appears to have slowed in the first half of this year, and while consumer spending still grew in the first quarter, the May retail sales report we received this morning may be another signal that the long-expected deceleration in consumer spending may finally be upon us,” Ms. Kugler said.

Last month, retail sales rose 0.1 percent, falling short of the market forecast of 0.2 percent. This was up from the downwardly revised negative 0.2 percent in April.

Chicago Fed chief Austan Goolsbee described himself to CNBC on June 24 as “closet optimistic,” though he is still searching for evidence that inflation is cooling.

Two Economists Differ

Former Treasury Secretary Larry Summers disagreed with Fed officials and argued against optimism that inflation would return to 2 percent soon.

Despite recent PCE and consumer price index (CPI) data suggesting that progress in the Fed’s strategy to restore price stability might have been revived, Mr. Summers is skeptical that this is true, given the “magnitude” of federal deficits and climate investments. As a result, he thinks interest rates will be higher than what the Fed and the markets are anticipating in the coming years.

“I thought it was kind of crazy when the market and the Fed thought a few months ago that there were going to be six or seven cuts in 2024,” Mr. Summers told a Council on Foreign Relations (CFR) event on June 24. “My guess still would be that they'll be somewhat less, and the future level of interest rates will be higher than the market generally supposes. The neutral interest rate is 4.5 percent.”

Looking ahead, Mr. Summers believes that the United States will be an “underlying inflation economy” of around 3 percent.

Torsten Slok, the chief economist at Apollo, thinks it will be a “very significant challenge” for the U.S. central bank to cut rates “when inflation expectations are out of control.”

Citing University of Michigan data, Mr. Slok noted that “half of the population has long-term inflation expectations that are dramatically higher than the other half.”

Last month, year-ahead inflation expectations rose to 3.3 percent, up from 3.2 percent in April, “remaining above the 2.3-3.0% range seen in the two years prior to the pandemic,” Joanne Hsu, the surveys of consumers director, said.

Long-run inflation expectations were unchanged for the second consecutive month at 3 percent, above the 2.2 percent to 2.6 percent range observed in the two years before the COVID-19-era public health crisis.

“While consumers recognize that realized inflation has eased substantially since 2022, a considerable share of consumers still express the burden that high prices exert on their lives,” Ms. Hsu said in the report.

Business, household, and investor inflation expectations play a pivotal role in monetary policymaking because the data reflect the public’s expectations for prices in the future. If businesses expect prices to rise three percent next year, consumers will also request a three percent raise in the year ahead.

Former Fed Chair Ben Bernanke discussed “anchored” inflation expectations in an appearance before the National Bureau of Economic Research (NBER) in 2022.

“So, for example, if the public experiences a spell of inflation higher than their long-run expectation, but their long-run expectation of inflation changes little as a result, then inflation expectations are well anchored,” Mr. Bernanke said.

While consumers forecast inflation to run above 3 percent in 2025, the Fed thinks the median inflation rate will be 2.3 percent.