“The progress made in reducing inflation since April is a welcome change, but core inflation remains uncomfortably above the Federal Open Market Committee’s 2 percent objective,” Fed Governor Bowman said on Monday.
At the FOMC’s most recent meeting on Sept. 17-18, Bowman was the lone dissenter, preferring a 25 basis point rate cut rather than a 50 basis point reduction in the federal funds rate target range to 4.75%-5.00%, the latter being the FOMC’s decision.
Since the Sept. 18 decision, she explained that a 50-basis-point rate cut could be seen as the Fed prematurely declaring victory over inflation. Alternatively, it could be seen as the FOMC seeing greater downside risks to the economy, a view she reiterated in a prepared text of a speech to the Georgia Bankers Association on Monday.
“In my view, starting the rate cut cycle with a 25 basis point move would better reinforce the robustness of economic conditions while also confidently recognizing the progress we are making toward our goals,” she said on Monday.
With pent-up demand and money on the sidelines, "lowering policy rates too quickly carries the risk of unleashing this pent-up demand, and a more cautious approach will also avoid unnecessarily stimulating demand and potentially reigniting inflationary pressures," she said.
Bowman also said her estimate of the neutral rate, or the level at which interest rates neither stimulate nor hinder economic growth, is much higher than it was before the pandemic. "With a higher estimate of the neutral rate, we will get there faster for any given pace of rate cuts."
She remains wary of inflation risks. Bowman noted that "global supply chains remain vulnerable to labor strikes and increased geopolitical tensions, which could lead to inflationary effects in food, energy and other commodity markets."
Regarding the labor market, Bowman pointed out that the U.S. labor market has been relieved from the extremely tight conditions of the past few years. The ratio of job vacancies to unemployed workers has further declined, slightly below the historical high before the epidemic, indicating that the number of available workers and the number of available jobs have reached a better balance. However, there are still more jobs than labor, which has only occurred twice in a longer period since World War II before 2018, which further shows that the labor market is still continuing to strengthen.
The rise in the U.S. unemployment rate largely reflects weak hiring, as job seekers entering or re-entering the labor force take longer to find jobs while layoffs remain rare. In addition to a cooling in labor demand, other factors could be contributing to the rise in the unemployment rate. A mismatch between new workers' skills and available jobs could be pushing the unemployment rate higher, suggesting that the increase is partly due to an increase in the labor supply. It's also possible that temporary factors are behind the recent increase in unemployment, such as the sharp increase in the unemployment rate for working-age teenagers in August.
Ultimately, Bowman said she and her colleagues will make decisions on a case-by-case basis based on incoming data and the implications for the economic outlook within the context of the Fed’s dual mandate of maximum employment and price stability.
Article forwarded from: Jinshi Data
