Federal Reserve’s Stance on Inflation and Interest Rates

Investing.com — US Federal Reserve Governor Michelle Bowman has flagged that major inflation gauges remain “uncomfortably above” the Fed’s stated target level, as she defended her decision to vote against a super-sized 50-basis point interest rate cut last week.

Bowman, in the first dissent by a Fed governor since 2005, instead supported a smaller drawdown of borrowing costs by 25 basis points.

The stance deprived Fed Chair Jerome Powell of total unity among Fed rate-setters during a time when the central bank has signaled intentions to begin a new easing cycle.

Speaking at the Kentucky Bankers Association Annual Convention in Virginia on Tuesday, Bowman noted the upside risks to inflation are “prominent,” with potential price pressures arising from aggressive fiscal policies and an ongoing imbalance between housing supply and demand.

Prior to last Wednesday’s jumbo rate reduction, interest rates had stood at a more than two-decade high for over a year, a level influenced by the Fed’s desire to tame skyrocketing inflation.

Although the pace of price gains has since cooled, some measures indicate lingering pressure from so-called “core” inflation, which excludes volatile items like food and fuel.

On an annualized basis, the core personal consumption expenditures (PCE) price index hit 2.6% in August. Bowman highlighted this figure, stressing that it is “uncomfortably above” the Fed’s 2% target. Updated PCE data is due to be released on Friday.

Bowman’s views contrasted with several other Fed officials earlier this week, who argued that the half-point cut was necessary due to the high rates placing excessive pressure on the economy while inflation appears to be fading and labor demand strains increase.

More Fed officials are set to speak this week, including Powell on Thursday.