Fed's Bowman says inflation remains a concern despite recent progress

By Greg Robb

Inflation remains more of a concern than potential weakness in the labor market, Federal Reserve Gov. Michelle Bowman said Tuesday.

"In my view, the upside risks to inflation remain prominent," Bowman said in a speech at a meeting of the Kentucky Bankers Association.

Bowman dissented from the Fed's aggressive half percentage point interest rate cut last week. She preferred a smaller quarter-point reduction. She was the first Fed governor to dissent from a FOMC decision since 2005.

In her speech, Bowman noted that the 12-month measure of core personal consumption expenditure inflation index came in at a 2.6% rate in July, well above the Fed's 2% target.

She also noted that the August consumer and producer price index reports suggest that 12-month core PCE inflation was likely "a touch above" the July reading.

Economists polled by the Wall Street Journal expect 12-month core PCE inflation to rise to a 2.7% annual rate in August. The data will be released on Friday.

Worries about inflation included a concern that global supply chains could be susceptible to labor strikes and geopolitical tensions, Bowman said. In addition, she said that expansionary fiscal policy in Washington could lead to higher inflation, as could increased demand for housing, especially given the limited supply of affordable housing.

"While it has not been my baseline outlook, I cannot rule out the risks that progress on inflation could continue to stall," she said.

Bowman said that she was in favor of slowly "recalibrating the Fed's policy rate and beginning the process of moving back to a more neutral stance of policy.

The median Fed forecast for a "neutral" rate, that neither pushes down or accelerates demand, is about 3%. Bowman didn't give her estimate but said it was "much higher" than it was before the pandemic.

Another reason Bowman said she didn't want to cut by a half-point last week was that market participants may expect the same pace of reductions at future meetings until the policy rate nears neutral.

This could work against the Fed's goal of returning inflation to 2%, she said.

There continues to be considerable amount of pent-up demand and cash on the sidelines ready to be deployed as the path of interest rates moves down.

"Bringing the policy rate down too quickly carries the risk of unleashing that pent-up demand and potentially reigniting inflationary pressures," she said.

While the labor market has softened, the economy remains solid, Bowman said.

"Although the labor market data have been showing signs of cooling in recent months, still elevated wage growth, solid consumer spending, and resilient GDP growth are not consistent with a material economic weakening or fragility," she said.

There are still more available jobs than available workers, a condition that signals ongoing labor market strength despite the recent data, she added.

Some economists share Bowman's concern.

Steven Ricchiuto, chief economist at Mizuho Americas, said he was worried there is no clear ideological bias in monetary policy at the Powell Fed.

Pivoting to try to combat weakness in the economy even though inflation hasn't returned to the 2% target might lead the market to lose confidence in the Fed's resolve to fight inflation.

"History doesn't always repeat itself, but the risk that current Fed policies will lead to inflation getting stuck at current levels, or higher, should be the principal risk domestic portfolio managers defend against, not a recession," Ricchiuto said, in a note to clients.

Robert Brusca, president of FAO Economics, agreed, noting that inflation has been over the Fed's 2% target for 40 months.

"Pledging to hit a target you are choosing to miss is not the way to restore credibility," he said.

-Greg Robb

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09-24-24 1101ET

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