Beware of rate cuts to avoid rekindling inflation

Federal Reserve (Fed) Governor Michelle Bowman speaks about the economic outlook and monetary policy at the annual Kentucky Bankers Association Convention in Virginia. Her comments come after the Fed last week announced a 50 basis point (bps) interest rate cut over four years and hinted that more rate cuts would come before the end of the year.

“In the current economic environment, with no clear signs of material weakening or fragility, in my view, starting the rate cut cycle with a 1/4 percentage point move would better reinforce the strength of economic conditions, while also recognizing with confident progress toward our goals,” Bowman noted.

Key quotes

Although the labor market has shown signs of cooling, wage growth, spending and GDP are not consistent with a material economic slowdown.

Upside risks to inflation remain important, including supply chain fragility, fiscal policy, housing supply and demand mismatch.

Recalibration policy is appropriate given the progress made on inflation, but should not yet declare victory.

Core inflation remains uncomfortably above the 2% target, with risks rising given continued spending and wage growth.

The rise in unemployment is largely due to slowing hiring and improving supply.

Disagreeing with the half-point cut justified by inflation still above target, a measured pace of cuts is more appropriate.

The estimate of the neutral rate is much higher than before the pandemic, the policy is not as restrictive as it might seem.

Market reaction

Following obscure comments, Bowman’s words sounded solicitous, although they had no impact on financial markets. The dollar index remains unchanged around 100.70 after such words.