Fed Dissenter: Focus on Inflation, Neutral Rate Much Higher Post-Pandemic

On Tuesday, Federal Reserve Governor Bowman, who cast the only dissenting vote at the Fed's September meeting, spoke out again.

She stated that the Fed should lower interest rates at a measured pace, believing that the risks of inflationary pressures still exist, and that the U.S. labor market has not shown significant weakness.

Bowman pointed out, "When it comes to the risks faced in achieving the dual mandate, I continue to see a greater risk to price stability, especially as the labor market continues to approach the estimated full employment."

Bowman's comments highlight a stark contrast with other Fed officials.

Most officials at the Fed recently believe that the risks facing the two major goals of maximum employment and price stability are roughly balanced or more inclined towards the risks faced by employment.

The Fed began its first interest rate cut in four years last Wednesday, with a cut of up to 50 basis points.

Among the committee members, only one person opposed the 50 basis point cut, and Federal Reserve Governor Bowman supported a 25 basis point cut.

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Bowman became the first Federal Reserve Governor to cast a dissenting vote since 2005.

Bowman said that when the Fed began to cut interest rates, she was inclined to adopt a more cautious approach, reflecting several considerations: In my view, starting the rate cut cycle at a quarter percentage point will better consolidate the strong economic conditions, while also confidently acknowledging our progress in achieving our goals.

The core inflation rate (excluding food and energy categories that are more volatile) is still uncomfortably higher than the Fed's 2% target.

By moving towards a more neutral policy stance at a steady pace, we will be more capable of further reducing the inflation rate to the 2% target, while closely monitoring changes in labor market conditions.

I will not pay too much attention to recent labor market data until there is a clear trend showing that both spending growth and the labor market have significantly weakened.

Wage growth indicates that the labor market is still tight, and temporary factors may have led to a recent increase in the unemployment rate.

However, if the data shows a significant weakening of the U.S. job market, it will support taking action and adjusting monetary policy as needed while considering the inflation task.

Fed Chairman Powell emphasized that a larger interest rate cut is aimed at maintaining a strong labor market, calling it a readjustment to ensure that the Fed will not fall behind.

Bowman said that she was grateful to Powell for directly addressing her concerns at the press conference, that a 50 basis point cut, which is too large, might inadvertently send a worry about potential economic conditions, or lead market participants to expect that the pace of future rate cuts will also be fast.

The latest forecast shows that although the median value of the dot plot shows that Fed officials support a cumulative interest rate cut of 50 basis points in the last two meetings of this year, policymakers have a clear divergence of views on the future interest rate path: out of 19 officials, 7 predict that there will only be another 25 basis point cut in 2024, and two oppose any further action this year.

Bowman said on Tuesday that her estimate of the neutral policy interest rate (the interest rate level that neither boosts nor restricts the economy) is much higher than before the COVID-19 pandemic.

"If the estimate of the neutral interest rate is higher, then for any given rate cut speed, we will reach the destination faster."

Bowman's estimate of the neutral interest rate is also quite different from some of her colleagues.

On Monday, several high-ranking officials at the Fed emphasized that the current interest rate level is still a long way from the neutral interest rate.

Last Friday, Bowman issued a statement explaining why she dissented from the Fed's 50 basis point rate cut in September.

In the statement, she said that a large rate cut could be seen as the Fed declaring a premature victory in the fight against high inflation.

She is inclined to ease the FOMC's monetary policy at a prudent pace to avoid re-boosting consumer demand.

"I believe that moving towards a more neutral policy stance at a prudent pace will ensure further reducing the inflation rate to the 2% target."