Michelle Bowman, Vice Chair of Supervision at the Federal Reserve, affirmed that there are strong economic reasons to proceed cautiously before taking any further steps toward lowering interest rates. Her remarks came amid persistent inflationary pressures and uncertainty surrounding the accuracy of economic data, which may have been affected by distortions resulting from last year's record-breaking government shutdown.
Caution in the face of economic risks
Bowman explained that downside risks to the labor market persist, necessitating a coordinated approach. Despite these risks, she believes that monetary policy should be guided toward a "neutral level" at a more measured pace this year, rather than hastily, which could lead to a resurgence in inflation.
Speaking at an event in Oahu, Hawaii, Bowman said, "After cutting interest rates by a total of 75 basis points in the latter part of last year, we have enough room to wait a little longer before taking further steps." She added that this pause would allow policymakers to assess the impact of lower monetary policy levels on public finances and their support for the labor market.
Background to the decision and the split vote
Bowman supported the Federal Reserve's decision this week to leave interest rates unchanged, following a series of three consecutive cuts implemented late last year. Policymakers voted 10-2 to keep the benchmark interest rate within the target range of 3.5% to 3.75%.
In contrast, Stephen Miran and Christopher Waller opposed this decision, preferring a quarter-point interest rate cut, reflecting differing views within the council on the pace required to ease monetary restrictions.
Economic context and the importance of timing
These statements are particularly significant in the context of global monetary policy, as investors and economists closely monitor the actions of the US Federal Reserve, considered a key indicator for global markets. Bowman's concept of a "neutral interest rate" is a price that neither excessively stimulates nor stifles the economy; reaching it at the wrong time could harm economic growth or reignite inflation.
Bowman noted that the key question during the last meeting concerned the timing of implementation: Should rapid easing continue to reach the neutral level by April, or should it proceed slowly and cautiously throughout the year? It appears that the balance tipped towards the second option to ensure market stability and avoid any unforeseen shocks.
Expected effects
The decision to hold off on cutting interest rates has direct implications for borrowing costs for individuals and businesses, as well as for bond yields and stock markets. This cautious policy will give the Federal Reserve more time to analyze incoming data, particularly regarding the labor market and consumer price indices, to ensure that the fight against inflation is truly won before abandoning its monetary tightening tools entirely.
