Fed Governor Michelle Bowman said she was cautious about further interest rate cuts, citing persistent inflation risks and a strong labor market.
Speaking at the Kentucky Bankers Association today, Bowman reiterated his belief that the Fed should cut rates at a “moderate” pace and expressed concern that the labor market was not showing significant signs of weakness.
“When it comes to risks to meeting our dual mandate, I continue to see greater risks to price stability, particularly as the labor market continues to approach full employment projections,” Bowman said.
Bowman’s comments differ from other Fed officials who have recently suggested that the risks to achieving the Fed’s goals of maximum employment and stable inflation are balanced, and even more focused on employment. Bowman’s stance is in sharp contrast because he continues to focus on inflation risks.
Last week, Bowman opposed the Fed's decision to cut interest rates by 50 basis points, opting for a smaller cut, the first Fed chair to do so since 2005. Bowman argued that a 25 basis point cut would be a more appropriate first step in a rate-cutting cycle, better reflect strong economic conditions and show the Fed's confidence in achieving its goals.
Bowman's cautious approach differs from that of Fed Chairman Jerome Powell, who has argued that a larger rate cut is necessary to maintain a strong labor market and prevent the Fed from falling behind in its intervention. Powell described the rate cut as an adjustment, not an indication of weakness in the economy.
Bowman acknowledged Powell's statement but remained concerned about the potential signals of a larger reduction, particularly the potential for market participants to expect more aggressive reductions. He emphasized that he would not overreact to the latest labor market data, including the rise in unemployment, which he attributed to temporary factors, unless there was a clear and significant deterioration in spending growth or labor market conditions.
Despite those concerns, Bowman said he was open to changing his stance if the labor market showed significant weakness. However, he noted that wage growth continued to point to a tight labor market despite recent increases in unemployment.
Bowman also noted that core inflation, which excludes volatile categories such as food and energy, remains “uncomfortably” above the Fed’s 2% target. Bowman argued that by moving toward a neutral policy stance at a measured pace, the Fed would be in a better position to reduce inflation while closely monitoring labor market conditions.
The Fed’s updated forecasts show that while most officials support another 50 basis point cut by year-end, the outlook for 2025 is less clear. Seven of the 19 officials see only a 25 basis point cut next year, while two oppose further reductions this year.
Bowman concluded by noting that the neutral policy rate estimate, which neither stimulates nor constrains the economy, is now higher than it was before the pandemic. “With a higher neutral estimate, we will get there quicker for any pace of rate cuts,” he said.
*This is not investment advice.
