Lingering Inflation Risks Justify Cautious Cuts – Reuters

By Howard Schneider

WASHINGTON – U.S. Federal Reserve Governor Michelle Bowman remarked on Tuesday that key measures of inflation remain "uncomfortably above" the Fed’s 2% target, indicating a need for caution as the central bank considers cutting interest rates.

Bowman acknowledged that progress has been made in reducing inflation since it peaked in 2022, suggesting it may be time for the Fed to reassess its monetary policy. However, she expressed her disagreement with last week’s decision to lower rates by half a point, advocating instead for a more cautious quarter-point reduction due to ongoing "upside risks to inflation." These risks include potential disruptions in global supply chains, aggressive fiscal policies, and a persistent imbalance between housing supply and demand.

"The U.S. economy remains robust, and core inflation continues to run uncomfortably above our 2% target," Bowman stated in comments prepared for a Kentucky Bankers Association event in Virginia. She noted that "core" inflation, which excludes food and energy prices, was estimated to be around 2.6% through August.

Bowman highlighted her preference for a more modest initial cut to the policy rate while acknowledging the strength of the economy and ongoing inflation concerns. She warned that there is a possibility of inflation progress stalling.

After maintaining the benchmark interest rate within a range of 5.25% to 5.5% for 14 months, the Fed recently voted 11 to 1 to reduce it to a range of 4.75% to 5%. Bowman’s dissent marked the first such instance by a member of the Fed’s Board of Governors since 2005.

While she is open to supporting further rate cuts if incoming data suggests a weakening job market, Bowman emphasized that current wage growth and the number of job openings compared to available workers indicate an overall strong labor market.

"I continue to see greater risks to price stability, especially as the labor market approaches full employment estimates," she said, noting an unemployment rate of 4.2%. She expressed concern that rapid rate cuts could unleash significant pent-up demand and excess cash, potentially leading to renewed inflation. Additionally, she suggested that monetary policy might not be as restrictive as some Fed officials assume.