The Fed’s lone dissenter is worried policymakers are moving too fast with rate cuts

Michelle Bowman believes the central bank should have cut interest rates by only 0.25%
By Sam Bourgi
•
23 September 2024
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Federal Reserve Governor Michelle Bowman thinks the central bank may be getting ahead of itself with aggressive interest rate cuts.

In a prepared statement, Bowman said the Fed’s half-point rate cut instead of the standard quarter-point move “could be interpreted as a premature declaration of victory” over inflation.

Instead, Bowman favors gradual rate reductions, which would “avoid unnecessarily stoking demand” and triggering a new bout of inflation.

As Creditnews reported, the Federal Open Market Committee (FOMC) was nearly unanimous in supporting a large rate cut on Sept. 18. Among the FOMC’s 12 voting members, Bowman was the lone dissenter.

Although inflation is getting closer to the Fed’s 2% target, it remains elevated by historical standards.

“I believe that moving at a measured pace toward a more neutral policy stance will ensure further progress in bringing inflation down to our 2% target,” said Bowman.

This isn’t the first time Bowman has warned about a looming inflation comeback. In August, she flagged the obscene national debt and high home prices as her main concerns.

Large deficits are a gateway to more inflation

At the current pace of government spending, it’s no surprise that the federal deficit has only widened since Bowman’s August remarks.

The total national debt is approaching $35.4 trillion. Excluding intragovernmental debt, the deficit stands at roughly $27 trillion, which is bigger than the national GDP.

Although the national deficit is out of sight, out of mind for most Americans, experts say that the relentless government spending will eventually catch up with them.

“Longer term, endless multi-trillion-dollar federal deficits will keep driving inflation higher,” said economist Peter Schiff.

The combination of low interest rates and massive deficits “will create a lot more inflation,” said Schiff.

“But if the Fed has to choose the lesser of two evils, i.e. higher inflation versus a bankrupt U.S. government, they will easily choose the path of inflation,” he explained.

This is because inflation is a slow bleed that gradually reduces Americans’ purchasing power over many years and decades. Politically, this is a better approach than addressing the issue head-on.

Schiff’s conclusion echoes research from the St. Louis Fed, which showed that ballooning deficits without an equal rate of growth creates more inflation.

“A continuing debt issuance not met by a corresponding growth in the demand for debt is likely to show up as a higher rate of inflation,” the St. Louis Fed said.

Fed Chair Jerome Powell has publicly stated that the pace of deficit spending is not sustainable. “We’ll have to do something [about it] sooner or later,” Powell said.

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