Bowman issues warning to rate cutters
Market remains most underestimated risk Federal Reserve Rate Hikes.
The Federal Funds futures market The Federal Reserve is almost certain to cut interest rates They see a 94% chance of at least one rate cut by the end of the year and a 65% chance of two cuts by the December meeting, and suggest a 66% chance of a cut in September despite the political outburst. Election Eve Cuts It will catch fire.
on tuesday, Federal Reserve Governor Michelle Bowman I tried to pour cold water on him. In prepared remarks in London, Bowman said there were some upside risks to inflation, reiterated that interest rates would need to remain high for some time and said he supported cutting rates. Higher Rates To increase If inflation remains at current levels.
“We have not yet reached a point where it is appropriate to lower policy rates,” Bowman said, “and we remain prepared to raise the target range for the federal funds rate at future meetings if inflation stagnates or even reverses.”
this is More Hawkish At first glance, it doesn’t seem that way. Many Fed officials have said they’d be prepared to raise rates if inflation starts to spike again, but they typically downplay the possibility. Bowman went a step further, saying he supports rate hikes that don’t raise inflation. What’s needed is Inflation is stagnating.
Interest rates are likely to remain high for a long time
Bowman’s position More hawkish on possible inflation developments In the near term, many Fed officials have noted the risk of higher inflation, but this is usually presented in conjunction with other downside risks to economic growth and labor market strength. In Fed parlance, these risks are often described as “balanced,” meaning that neither dominates. Officials often say that “Baseline Outlook” Inflation continues to decline toward the 2% target, and if the Fed becomes confident enough about this disinflationary trend, it will likely cut interest rates.
Bowman said his baseline outlook is that “U.S. inflation will continue to rise. [Federal Open Market Committee’s] “A 2 percent target,” he said, but quickly added that this also included the expectation that the federal funds rate would remain at its current level “for some time.”
“If upcoming data show that inflation is moving sustainably towards our 2% target, Finally “It would be appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive,” Bowman said.
We put emphasis on the “eventually” part. Finally This seems to suggest that this is not the case. Coming soonIn our reading, This makes a rate cut in September less supportable.That’s important because even if Fed Chairman Jerome Powell were willing to support a rate cut as soon as September, he would want the Federal Open Market Committee (FOMC) to be united in support of a rate cut, given the almost certain political uproar that would ensue. Powell doesn’t want to start making cuts with a divided Congress on the eve of an election..
Bowman, during a moderated discussion following his prepared remarks, made clear that he does not expect any cuts this year. I said in early MayThe important thing here is She maintains her positionHe declined to follow recent data that analysts and Wall Street are reading into the possibility of a rate cut this year.
Chairman Jerome Powell attends a meeting of the Federal Open Market Committee (FOMC) in Washington, DC, January 30-31, 2024. (Board of Governors of the Federal Reserve System, via Flickr)
Bowman too Labor market concerns ignored From her consideration of potential economic scenarios that could affect monetary policy, all of her deviations from the baseline concerned upside risks to inflation.
High immigration risks higher inflation
Bowman said in prepared remarks. Five risks to inflation Will it stagnate at its current level or rise?
The first risk is The end of supply-led deflationSupply chains are likely to normalize, labor force participation rates are likely to level off, and wage-depressing migration across the southern border is likely to be contained. In Bowman’s view, “further supply-side improvements are unlikely to continue to drive down inflation going forward.”
The second risk is “Geopolitical developments,” also known as warThere is the war in Gaza, the ongoing conflict in the Red Sea, the war in Ukraine. These create “risks that spillover effects from regional conflicts could disrupt global supply chains, putting further upward pressure on food, energy and commodity prices.” In other words, wars tend to create inflation, and we have a lot of them.
The third risk is White House Financial ExcessesAlthough Bowman did not put it that way, he noted that “additional fiscal stimulus could spur demand, impede further progress and even fuel inflation.”
of The stock market’s soaring valuation There’s a fourth risk: Rising stock prices reflect investors’ willingness to bid up the value of future cash flows, which could lead to easier financial conditions, boosting demand and accelerating inflation.
The fifth risk is perhaps the most controversial. Immigration fuels inflationEspecially housing inflation.
“Rising immigration and continued tight labour markets pose a risk to persistently high core services inflation. Given the current low stock of affordable housing, the influx of new immigrants into some areas could lead to upward pressure on rents as additional housing supply may take time to materialise,” Bowman said.
Bowman is now a heretic. Regarding the FOMC, in the latest economic forecasts by Fed officials, four predicted no rate hikes, seven predicted one rate cut, and the remaining eight predicted two rate cuts. However, it would be a mistake to dismiss her views just because they are in the minority at this point. Powell would like to see a unanimous committee. A minority of hawks were behind the initial cuts, so their influence may be greater than their numbers suggest.
