Fed governor warns inflation battle isn’t over

FOMC member Michelle Bowman believes Wall Street and policymakers underestimate the risk of an inflation comeback
By Sam Bourgi
•
13 August 2024
Share:
inflation, groceries

Federal Reserve Governor Michelle Bowman thinks American policymakers and Wall Street are shrugging off inflation risks too early.

In a speech at the Kansas City Bankers Association, Bowman said, “The progress in lowering inflation during May and June is a welcome development, but inflation is still uncomfortably above the committee’s 2% goal.”

Bowman, who’s a member of this year’s Federal Open Market Committee (FOMC) in charge of setting interest rates, said she “will remain cautious in my approach to consider adjustments to the current stance of policy.”

The central banker said she’s especially concerned about government spending, rising home prices due to immigration, and geopolitical risks triggering another bout of inflation.

The national debt has crossed $35 trillion for the first time, home prices are at record highs, and commodity prices remain sensitive to Mideast tensions.

Those factors contributed to a sharp rebound in inflation at the beginning of the year. Inflation has moderated since, with key inflation measures gradually inching closer to the Fed’s target.

The Fed’s preferred measure of inflation—the core Personal Consumption Expenditures index—has fallen to a three-year low of 2.6%.

Nevertheless, Bowman’s comments suggest policymakers have a bit of inflation PTSD after misjudging its trajectory too many times since the start of the pandemic.

The Fed is stuck between a rock and a hard place

If other FOMC members are as concerned about inflation as Bowman, the September meeting might present quite a dilemma.

The Fed is under extraordinary pressure to lower interest rates as soon as possible—and preferably by more than 0.25%— after a recent dismal jobs report.

Another trigger was the Bank of Japan's decision to raise rates in July, which led to the end of the so-called yen carry trade, setting off a global stock rout.

Chicago Fed President Austan Goolsbee shrugged off the market sell-off, telling The New York Times that “there’s nothing in the Fed’s mandate that’s about making sure the stock market is comfortable.”

What is one of the Fed’s objectives is full employment. According to Queens College President Mohamed El-Erian, this is where the central bank has failed miserably

Economists worry that policymakers are too far "behind the curve" on interest rates and that, by the time they start cutting, it’ll be too late to avoid a recession.

Future markets are betting that the Fed will start cutting rates in September, and not just a little. They estimate there's a better than 50-50 chance of a 0.5% cut.

More from Creditnews: