Federal Reserve Gov. Michelle Bowman said Tuesday that inflation is still a bigger worry than a possible weakening of the job market.
“The risks to inflation going up are still very high,” Bowman said in a speech at a meeting of the Kentucky Bankers Association.
Bowman didn’t agree with the Fed’s sudden cut of 0.5 percentage points in interest rates last week. She wanted a decrease of only a quarter point. If you go back to 2005, she was the first Fed governor to disagree with a FOMC ruling.
Bowman said in her speech that the consumer price index for the past 12 months showed a rate of 2.6% in July, which is much higher than the Federal Reserve’s goal of 2%.
She also said that the consumer and producer price index reports for August show that it’s likely that 12-month core PCE inflation was “a touch above” the July number.
A poll of economists by the Wall Street Journal found that they think 12-month core PCE inflation will rise to 2.7% per year in August. The information will be made public on Friday.
Bowman said that people who were worried about inflation were also worried that labor strikes and political unrest could affect global supply lines. She also said that Washington’s “expansionary fiscal policy” could cause inflation to rise and housing prices to rise, especially since there isn’t a lot of cheap housing available.
“That wasn’t my initial prediction, but I can’t rule out the chance that progress on inflation will continue to stall,” she said.
Bowman said she thought the Federal Reserve should slowly “recalibrate its policy rate and start the process of moving back to a more neutral stance of policy.”
The Fed thinks that a rate of about 3% will be “neutral,” meaning that it will neither slow down nor speed up demand. Bowman didn’t say how much she thought it was, but she did say it was “much higher” than it was before the pandemic.
Bowman said last week that she didn’t want to cut by a half-point because market players might expect her to keep cutting rates at the same rate until the policy rate gets close to neutral.
She said this could hurt the Fed’s plan to get inflation back to 2%.
A lot of demand and cash that has been sitting around waiting to be used is still there, ready to be used as interest rates go down.
“If the policy rate is lowered too quickly, that pent-up demand could be released, which could lead to inflationary pressures rising again,” she said.
Bowman said that the economy is still strong even though the job market has gotten weaker.
“Even though job market data have been showing signs of slowing down in recent months, strong consumer spending, high wages, and strong GDP growth do not point to a material weakening or fragility of the economy,” she said.
Even with the new numbers, there are still more open jobs than people looking for work, which shows that the job market is still strong, she said.
There are scientists who agree with Bowman.
Steven Ricchiuto, chief economist at Mizuho Americas, said he was worried that the Powell Fed’s monetary policy doesn’t have a clear ideological bent.
If the Fed changes its plans to fight inflation to fight economic weakness even though inflation hasn’t returned to the 2% goal, the market might lose faith in the Fed’s ability to do so.
“History doesn’t always repeat itself, but the main risk that domestic portfolio managers should protect against, not a recession, is that current Fed policies will cause inflation to stay at or above current levels,” Ricchiuto wrote in a note to clients.
FAO Economics head Robert Brusca agreed, pointing out that inflation has been above the Fed’s 2% goal for 40 months.
“Making a promise to hit a target you plan to miss is not the way to rebuild trust,” he said.
