Cautious on rate cuts to avoid reigniting inflation

Federal Reserve (Fed) Governor Michelle Bowman speaks about the economic outlook and monetary policy at the Kentucky Bankers Association Annual Convention in Virginia. Her comments come after the Fed announced last week the first 50 basis points (bps) rate cut in four years and hinted at more interest rate cuts coming before year-end.

“In the current economic environment, with no clear signs of material weakening or fragility, in my view, beginning the rate-cutting cycle with a 1/4 percentage point move would have better reinforced the strength in economic conditions while also confidently recognizing progress toward our goals,” Bowman noted.

Key quotes

Though labor market has shown signs of cooling, wage growth, spending and GDP not consistent with a material economic weakening.

Upside risks to inflation are still prominent, including supply chain fragility, fiscal policy, mismatch of housing supply and demand.

Re-calibrating policy is appropriate given progress on inflation, but should not declare victory yet.

Core inflation remains uncomfortably above the 2% target, with upside risks given ongoing growth in spending, wages.

The rise in unemployment is largely due to slowed hiring and improving supply.

 Dissent to half-point cut warranted by inflation still above target, a measured pace of cuts is more appropriate.

The estimate of neutral rate is much higher than before the pandemic, policy not as restrictive as it may seem.

Market reaction

Following a rough of dovish comments, Bowman’s words sounded hawkish, although they had no impact on  financial markets. The Dollar Index stays unchanged around 100.70 after such words.