The Federal Reserve can’t be in any hurry to lower short-term interest rates in coming months as it carefully monitors inflation, labor market and other indicators, two members of the Fed’s Board of Governors suggested Tuesday.
Fed Governors Michelle Bowman and Lisa Cook are often thought of as being on different ends of the monetary policy spectrum, but they largely concurred that they lack enough confidence yet that inflation is headed down to 2% to support reductions in the federal funds rate.
Bowman and Cook joined a chorus of other Fed officials who have advocated caution, patience and data dependence since the Fed’s rate-setting Federal Open Market Committee left that policy rate unchanged in a 5.25-5.50% target range on June 12.
There are tentative indications, though, that Fed policymakers are starting to diverge somewhat, with some putting more emphasis on downside risks to economic growth and employment.
Bowman repeated that she stands ready to raise the funds rate if needed in a speech at the Policy Exchange in London. She acknowledged progress against inflation but said it’s still too high and subject to upside risks. So, she emphasized caution.
Cook, meanwhile, also voiced a commitment to bringing down inflation in a speech to the Economic Club of New York, but she sounded somewhat more attentive to potential weakness in the labor market that might require the Fed to ease a policy which she insisted is “restrictive.”
Both officials voted with the FOMC majority to hold rates steady and to declare that it ”does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
FOMC participants projected just one 25 basis point rate cut this year to a median 5.1% — down from the three cuts projected in March and the six or more cuts financial markets were hoping for prior to a series of discouraging first quarter inflation reports.
Cook urged that greater attention be paid to “the distribution” of the funds rate dots – noting that FOMC participants were divided in thirds between projecting one rate cuts, two rate cuts or no rate cuts.
Bowman, one of the FOMC’s leading hawks, doesn’t seem to have changed her views very much despite some moderation of inflation, GDP growth and labor market tautness.
“Looking ahead, I will be closely watching the incoming data as I assess whether monetary policy in the U.S. is sufficiently restrictive to bring inflation down to our 2 percent goal over time ….,” she said in prepared remarks.
“My baseline outlook continues to be that U.S. inflation will return to the FOMC’s 2 percent goal, with the target range of the federal funds rate held at its current level of 5-1/4 to 5-1/2 percent for some time,” she continued. “Should the incoming data indicate that inflation is moving sustainably toward our 2 percent goal, it will eventually become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive.
“However,” Bowman went on, “we are still not yet at the point where it is appropriate to lower the policy rate. In my view, we should consider a range of possible scenarios that could unfold when considering how the FOMC’s monetary policy decisions may evolve.
And, as she’s done before, Bowman declared, ‘I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse.”
“Given the risks and uncertainties regarding my economic outlook, I will remain cautious in my approach to considering future changes in the stance of policy,” she said. “Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2 percent over the longer run…..”
Bowman conceded that “we saw significant progress on lowering inflation in the U.S. while the economy and labor market have remained strong.” She said this shows that “the restrictive stance of monetary policy reduced demand-side inflation pressures.”
However, she lamented that “since the beginning of 2024, however, we have seen only modest further progress on inflation and she was gloomy about the inflation outlook. “(W)ith average core CPI inflation this year through May running at an annualized rate of 3.8 percent, notably above average inflation in the second half of last year, I expect inflation to remain elevated for some time.”
Bowman acknowledged some slowing of economic activity.
“Recent data suggest some moderation in economic activity early this year…..,” she said. “Continued softness in consumer spending and weaker housing activity early in the second quarter also suggest less momentum in economic activity so far this year ….”
But Bowman suggested that growth has not cooled enough to relieve wage price pressures.
“Despite some further rebalancing between supply and demand, the labor market remains tight …,” she said. “With labor markets remaining tight, wage growth has been elevated at around or above 4 percent, still higher than the pace consistent with our 2 percent inflation goal given trend productivity growth.”
Speaking of the outlook and the balance of risks the rest of this year, Bowman continued to put primary emphasis on concerns about inflation even as some other Fed officials have started to shift their focus somewhat to downside economic risks:
“Inflation in the U.S. remains elevated, and I still see a number of upside inflation risks that affect my outlook,” she said.
“First, it is unlikely that further supply-side improvements will continue to lower inflation going forward….,” she continued. “Geopolitical developments could also pose upside risks to inflation, including the risk that spillovers from regional conflicts could disrupt global supply chains….”
Bowman also warned that “the risk that the loosening in financial conditions since last year, reflecting considerable gains in equity valuations, and additional fiscal stimulus could add momentum to demand, stalling any further progress or even causing inflation to reaccelerate.”
“Finally, there is a risk that increased immigration and continued labor market tightness could lead to persistently high core services inflation….,” she added.
Cook also reiterated her commitment to bringing inflation down “sustainably” to 2% but took a distinctly less hawkish approach than Bowman. She focused more on risks to both sides of the Fed’s dual mandate.
“Over the past year, inflation has slowed, and labor market tightness has eased, such that the risks to achieving our inflation and employment goals have moved toward better balance,” she said in prepared remarks, adding that her task as policymaker is to “ensure that monetary policy brings inflation fully back to 2 percent over time while being attentive to the risk of a slowing labor market.”
Cook noted that “after rapid disinflation in the second half of last year, progress has slowed this year” and said her focus “remains on making sure inflation is on a path to return sustainably to 2 percent.”
But she was optimistic that further progress will be made in lowering inflation.
“I expect that the longer-run disinflation trend will continue as interest rates weigh on demand,” she said, pointing to anecdotal reports that “consumers are pushing back on price increases” and calling long-term inflation expectations “well-anchored.”
Cook forecast that inflation “will continue to move lower on a bumpy path, as consumers’ resistance to price increases is reflected in the inflation data.”
Turning to the maximum employment side of the Fed’s dual mandate, she said, “the labor market has largely returned to a better alignment between supply and demand” and is now “tight but not overheated.” She maintained that “payroll job gains were overstated last year and may continue to be so this year.”
Cook pointed to “signs of better balance in the labor market” and to “moderating” wage gains.
She also cited slower growth in consumer spending and in turn GDP growth, as well as rising credit card delinquencies, saying, “these rates are not yet concerning for the overall economy but bear watching.”
Given that outlook, Cook gave a more dovish, or at least more balanced, monetary policy prescription.
“I believe our current monetary policy stance is restrictive, putting downward pressure on aggregate demand in the economy,” she said. “With disinflation continuing, albeit at a slower pace this year, and the labor market having largely normalized, I see the risks to achieving our employment and inflation goals as having moved toward better balance…..”
Cook cited a number of financial market indicators, as well as developments in the housing market and the labor market to contend repeatedly that monetary policy is “restrictive” – strongly implying that she would not support taking rates higher.
Given economic uncertainty, Cook advocated looking at different policy scenarios.
“One scenario is the possibility that persistently high inflation durably increases inflation expectations.,” she said. “While this appears less likely than a year or two ago, I am very attentive to the evolution of inflation expectations. Such a risk would imply keeping monetary policy restrictive for longer.”
“Another scenario would be that the economy and labor market weaken more sharply than expected in my baseline forecast,” she continued. “In that case, monetary policy would need to respond to such a threat to the employment side of the dual mandate.”
“Considering the balance of risks related to these scenarios, I believe that our current policy is well positioned to respond as needed to any changes in the economic outlook,” Cook went on.
“With significant progress on inflation and the labor market cooling gradually, at some point it will be appropriate to reduce the level of policy restriction to maintain a healthy balance in the economy,” she added. “The timing of any such adjustment will depend on how economic data evolve and what they imply for the economic outlook and balance of risks.”
Responding to questions, Cook repeatedly stressed that she and her colleagues are “data dependent,” but seemed to tilt toward greater concern about employment.
She said the 4.0% May unemployment rate (up from a post-pandemic low of 3.4%) is still historically low and said it would have to rise “significantly” to force a Fed response.
However, she said that, when fighting inflation, “we prioritized one side of the mandate, and we will prioritize the other side if we see” rising unemployment.
Cook refused to say when she thinks the Fed should start cutting the funds rate.
“We will move when it’s appropriate to move,” she said. “We’re data dependent.”
A host of other Fed officials have also weighed in since the FOMC met.
On Monday, San Francisco Federal Reserve Bank President Mary Daly echoed Bowman and others in saying the Fed has “more work to do” to reach its inflation goal, but she said that monetary policy will likely need to pay increasing attention to the “maximum employment” side of its mandate.
Citing the decline of inflation from its peak, she said, “That’s a lot of improvement and we should acknowledge it. But we are not there yet. So, we must continue the work of fully restoring price stability without a painful disruption to the economy.”
“Monetary policy is working, but we need to finish the job,” she added.
Daly, who joins Bowman and Cook as a voting member of the FOM this year, said, “we are still in the fight to bring inflation to our 2 percent target. We’ve made a lot of progress, but there is still work to do.”
But she went on to express a more dovish, or at least more nuanced, viewpoint than the usually hawkish Bowman.
Thus far, she estimated that two thirds of the decline in PCE inflation derived from “supply-driven” factors, but now she said the Fed will need to rely more on reduced demand from higher interest rates to complete the process of reducing inflation to 2%.
“Increasingly, restrained demand, rather than improved supply, will likely be needed to get inflation down to target,” she said, warning that reducing demand to cool inflation through monetary restraint could in turn hurt jobs.
So far, Daly said, “progress (against inflation) has come without a significant disruption to the labor market …. (T)he labor market has adjusted slowly, and the unemployment rate has only edged up.”
“But,” she added, “we are getting nearer to a point where that benign outcome could be less likely.”
Daly observed that the ratio of job vacancies to job seekers – the so-called Beveridge Curve – has moderated increases in the unemployment rate, But she said, “Going forward, this tradeoff may not be as favorable …. (F)uture labor market slowing could translate into higher unemployment, as firms need to adjust not just vacancies but actual jobs.”
So “at this point, inflation is not the only risk we face,” she elaborated. “We will need to keep our eyes on both sides of our mandate—inflation and full employment—as we work to achieve our goals.”
Going forward, Daly said the Fed will “need to be vigilant and open.” It will need to “be appropriate, policy has to be conditional. And we have to think in scenarios.”
“For example, if inflation turns out to fall more slowly than projected, then holding the federal funds rate higher for longer would be appropriate,” she continued. “If instead, inflation falls rapidly, or the labor market softens more than expected, then lowering the policy rate would be necessary. Finally, if we continue to see gradual declines in inflation and a slow rebalancing in the labor market, then we can normalize policy over time, as many expect.”
Since each of these scenarios is “possible,” Daly said, “we need to be ready to respond to however the economy evolves.”
Also Monday, Chicago Fed President Austan Goolsbee said he is hoping to get “a little bit more confidence” that inflation is coming down and described himself as “a closet optimist that we’re going to see improvement.”
But he too turned his attention to the employment side of the “dual mandate.”
“If unemployment claims are going up, the unemployment rate is inching up, many of the other measures have cooled down to something like what they were before the pandemic and you start to see weakness on consumer spending,” he said, adding that this may force the Fed to think more about risks to economic growth and employment.
“If you’re going to be extra restrictive for too long, you’re going to have to start worrying about what’s happening to the real economy,” he cautioned.
Fed policymakers and Fed watchers alike are anxiously awaiting the Commerce Department’s May report on its price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge.
The consumer price index showed some modest improvement last month, but remained well above target, rising 3.3% from a year earlier overall and 3.4% on a core basis. The PCE report is expected to show smaller gains.
