Fed's Bowman: Greater Confidence in Falling Inflation Needed Before More Cuts

Michelle Bowman, a member of the Federal Reserve's Board of Governors, recently expressed caution about the need for further interest rate cuts, emphasizing the importance of greater confidence in falling inflation before proceeding with additional monetary policy easing. In a speech delivered on February 12, 2023, Bowman highlighted the challenges posed by elevated inflation and the need for a data-dependent approach to monetary policy.

Inflation has been a persistent concern for the Federal Reserve, with the Consumer Price Index (CPI) rising to a 12-month rate of 7.5 percent in January 2023. Bowman acknowledged that inflation progress has "stalled in recent months" and sees "upside risks" to her outlook. She noted that wage growth has lagged behind inflation for the past year, making it challenging for many families to make ends meet. Additionally, rising home prices may prevent many from entering the housing market, and small businesses continue to face cost and hiring difficulties.



Bowman's cautious approach to adjusting policy, given the elevated inflation and risks, has implications for future monetary policy decisions. She prefers a gradual and data-dependent approach, suggesting that the Fed may be more inclined to wait for clearer signs of inflation moderation before making further rate cuts. This stance could help prevent prematurely fueling demand and reigniting inflationary pressures.

Bowman also indicated that the neutral policy rate may be higher than previously estimated, implying that the Fed might be closer to the neutral stance than initially thought. This suggests that the Fed may need to be more cautious in lowering rates further to avoid stimulating the economy too much and potentially reversing inflation gains.



To regain confidence in falling inflation and support further rate cuts, Bowman would likely consider the following specific indicators or developments necessary:

1. Sustained decline in inflation rates: Bowman has expressed concern about inflation stalling in recent months. She would likely want to see a consistent and significant decline in inflation rates across various categories, not just a one-off decrease.
2. Improving labor market conditions: Bowman has emphasized the importance of a strong labor market. She would likely want to see a continued improvement in unemployment rates and wage growth that keeps pace with inflation.
3. Reduction in core services inflation: Bowman has highlighted the risk of persistently high core services inflation. She would likely want to see a decrease in this category, which has been a significant contributor to overall inflation.
4. Clarity on incoming administration's policies: Bowman has suggested that the coming months should bring clarity on the incoming administration's policies and their potential impact on inflationary pressures.
5. Data revisions: Bowman has acknowledged the challenges in assessing the economy due to data revisions in recent years. She would likely want to see consistent and reliable data that supports a continued decline in inflation.

In conclusion, Michelle Bowman's cautious approach to monetary policy decisions suggests that the Fed may be more inclined to wait for clearer signs of inflation moderation before making further rate cuts. Investors should monitor the indicators and developments Bowman highlighted to assess the likelihood of additional rate cuts and their potential impact on the economy and financial markets.