Federal Reserve Governor’s Caution on Policy Shift

(Reuters) – Federal Reserve Governor Michelle Bowman expressed caution regarding any shifts in the U.S. central bank’s policy, highlighting ongoing risks for inflation. She warned that responding too quickly to single data points could jeopardize existing progress.

In remarks prepared for a gathering of bankers in Alaska, Bowman reaffirmed her hawkish stance within the Fed. While she did not indicate readiness to raise rates further, she showed no signs of supporting a rate cut at the upcoming Fed meeting on September 17-18, as is widely anticipated.

Bowman stated that inflation should continue to decline under current policies, and if it approaches the Fed’s 2% target sustainably, it may be appropriate to gradually lower the federal funds rate to avoid overly restrictive monetary policy affecting economic activity and employment.

However, she emphasized the need for patience to not undermine progress in reducing inflation by overreacting to individual data points, referencing shifts in focus among several Fed officials after a July employment report indicated slower hiring and a rise in unemployment to 4.3%, a post-pandemic high.

She advised caution due to inconsistencies in the latest employment report. While the strength of hiring may have been overstated, the rise in unemployment could also exaggerate the cooling labor market.

Bowman highlighted challenges in accurately assessing the current state of the economy and predicting its evolution due to increased measurement difficulties and frequent data revisions. Therefore, she remains cautious in considering adjustments to the current policy stance.

Financial markets fully expect the Fed to cut its benchmark interest rate next month from the current range of 5.25%-5.50%, with forecasts leaning towards a quarter-percentage-point reduction instead of a half-percentage-point cut.