– Bowman: Getting Inflation Down to 2% ‘Of Utmost Importance” for Fed Credibility
– Goolsbee: Hopeful Disinflation Will Resume But Now’s Time to “Sniff” the Data
By Steven K. Beckner
(MaceNews) – Financial markets have managed to keep alive hopes for lower interest rates this week, but remarks from senior Federal Reserve officials on Friday ran counter to those aspirations.
Fed Governor Michelle Bowman declared “it is of utmost importance that we maintain credibility in pursuing our fight against inflation by proceeding carefully and deliberately to achieve our 2% goal.”
Although she was not specific about her policy preferences in remarks to the Texas Bankers Association, Bowman has recently said she is prepared to raise interest rates again to curb inflation.
Later Friday, Chicago Federal Reserve Bank President Austan Goolsbee expressed hope that inflation will resume last year’s downtrend, but said that if it does not, the Fed will “have to act.”
Goolsbee, who is usually thought of as having a less hawkish policy approach than Bowman, said that for the time being, he and his Fed colleagues need to “sniff” the data to determine whether monetary policy is restrictive enough to get inflation down to the Fed’s 2 % target.
Meanwhile, Atlanta Fed President Raphael Bostic repeated his belief that the Fed will only be able to justify one modest rate cut later this year.
These remarks were just the latest in a series of comments from Fed officials suggesting there is no hurry to ease monetary policy at the U.S. central bank.
They came nine days after the Fed’s ’s policymaking Federal Open Market Committee unanimously left the federal funds rate in a 5.25% to 5.50% target range for the sixth straight meeting, and after Chair Jerome Powell reiterated that the apparent stalling out of progress against inflation means that key short-term interest rate will likely need to stay at current levels for longer than previously expected.
In its policy statement, the FOMC sent strong signals that any easing of monetary policy will be delayed due to disappointing first quarter inflation data.
Powell reinforced that message in his post-FOMC press conference, saying, “We … do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%.”
“So far this year, the data have not given us that greater confidence,” he continued. “In particular, … readings on inflation have come in above expectations.”
Wall Street drew some encouragement when Powell said “it’s unlikely that the next policy rate move will be a hike” and that to raise rates the FOMC would “need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation down to 2%.”
However, the Fed chief did not rule out rate hikes and made clear rate cuts are also unlikely in the foreseeable future. “It is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current target range for the federal funds rate as long as appropriate.”
Two days after the FOMC meeting, financial market hopes for rate cuts swelled anew when the Labor Department released a softer than expected March employment report, but the slower growth of payrolls and wages did not appear to rise to the standard of “an unexpected weakening in labor markets” which Powell had laid down for easing.
Hours after the employment report, Bowman asserted, “I remain willing to raise the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or reversed. Restoring price stability is essential for achieving maximum employment over the longer run.”
Despite the unexpected downturn of non-farm payrolls and wage growth and the uptick in unemployment, Bowman said, “Payroll employment has increased at a strong pace through April this year, partly reflecting increased immigrant labor supply. Although we had seen signs of the labor market coming into better balance, recent employment reports show a continued tight labor market, with the unemployment rate remaining below 4%, and the number of job openings relative to unemployed workers is still above its pre-pandemic level.”
Bowman also discounted the Commerce Department’s advance GDP report showing slower than anticipated 1.7% first quarter growth. “Economic activity increased at a strong pace last year and has maintained momentum over the first three months of this year. Although first-quarter growth in gross domestic product was temporarily dampened by volatile categories, such as inventories and net exports, consumer spending on services remained robust, and residential activity and business investment in equipment and intangibles strengthened.”
Bowman warned of “a number of upside inflation risks” and said she would “continue to monitor the incoming data to assess whether monetary policy is sufficiently restrictive to bring inflation down to our target….”
In her latest appearance, Bowman avoided specific monetary policy prescriptions, but continued to inveigh against inflation, noting it is “a key risk identified in the Financial Stability Report, and in surveys of bankers.”
While supporting a continued Fed battle against inflation, she acknowledged that “monetary policy can present risks to the banking system and the broader financial system. Changes in interest rates can make it more difficult for banks to manage interest rate risk, particularly in the face of rapid rate increases like those from 2022 and 2023.”
Goolsbee, a non-voter who not long ago was envisioning a “golden path” to an economic “soft landing” that would permit early monetary easing, made clear he is now much more hesitant about cutting rates.
Rejecting the “hawk” vs. “dove” dichotomy, Goolsbee said he is “not a bird” but a “data dog” in an appearance at the Economic Club of Minnesota. As such, he said his “first rule is to know when to walk and know when to sniff.”
“Now, we sniff some more,” he added.
Goolsbee said he is hopeful inflation will fall from the recent 3% range as housing prices begin to come down, but said he can’t count on that.
After three months of disappointing inflation data, he said the FOMC must determine whether the economy is “overheating” or whether other global supply-side factors or seasonal adjustment problems are skewing the price indices higher.
Again, he said Fed policymakers need to “start sniffing” to find the answer. So he declined to say when or by how much the FOMC might cut rates.
Echoing the FOMC and Powell, Goolsbee said rate cuts “are dependent on getting more evidence to feel confident that we’re on a path to 2%…. If you were already confident that you’re on a path to 2% the FOMC statement directly implies that’s when you consider rate cuts.”
Goolsbee recalled he was once “critical” about the wisdom of adopting a 2% inflation target, but now that it’s been publicly announced, the FOMC is “married” to it.
“We’re going to get to 2%, not 3%,” he asserted.
Goolsbee said he is “still optimistic that we’re not going to get hung up at 3 the way some folks fear.”
Nevertheless, he said the fact that inflation averaged 3 ½% or more in the January-March period “changed my view from (believing) we were clearly on path down to 2%..to: we have to wait and see.”
“This uptick in inflation was accompanied by continued strong jobs numbers and GDP, which looks like an overheating observation, not a supply observation,” he added.
Goolsbee went on to say that if the first quarter inflation resurgence “is a long lasting thing and not a blip, that’ s how the Fed has to think ” and act accordingly. “If you make a public commitment to 2%… you have to deal with any conditions…If there is overheating we’ll get inflation back to 2%…whatever we do.”
He expressed hope that inflation will come down as housing prices and rents retreat. If that happens, he said, “we will start to see overall improvement, and it will be fairly clear we will be in an optimistic lane to ride inflation back to 2%.”
However, he quickly added, “If that doesn’t happen…we would move into a different world where the Fed has to act” – that is to tighten policy.
Goolsbee downplayed a University of Michigan survey showing an uptick in consumers’ inflation expectations, saying he was “not surprised” given the first quarter inflation data and maintained that long-term inflation expectations have not risen.
Bostic, an FOMC voter, expressed hope that economic growth and labor markets will exhibit further slowing, but said, “I don’t think we’re going to know that for at least a couple of months.”
For now, he told Reuters that he’s sticking with his view that the FOMC won’t be able to cut the funds rate more than 25 basis points late in the year.
An array of other Fed officials have also reiterated an extraordinarily cautious, inflation-wary monetary policy approach this week.
For instance, Richmond Fed President Thomas Barkin, referring to the first quarter reversal of last year’s progress against inflation, said “the recent data whiplash has only confirmed the value of the Fed being deliberate.”
“The economy is moving toward better balance, but no one wants inflation to reemerge, the FOMC voter continued. “We have said we want to gain greater confidence that inflation is moving sustainably toward our 2% target. And given a strong labor market, we have time to gain that confidence.”
Boston Fed President Susan Collins said that “while economic activity has remained relatively robust, and the labor market healthy with signs of coming into better balance, we have not, unfortunately, seen further disinflationary progress….”
“Going forward, we cannot necessarily count on continued supply side progress to reduce inflation amid strong economic activity….,” she continued. “(P)rogress on inflation will very likely require lower growth in demand, particularly to facilitate further slowing of core non-housing services inflation.”
So Collins, not ordinarily thought of as a “hawk,” said “the current situation requires methodical perseverance, recognizing that progress will take time and continue to be uneven….(T)he unusual nature of this cycle, the continued high degree of uncertainty, and still-elevated inflation, all highlight the importance of patience, analysis, and a bit of humility.”
Voting San Francisco Fed President Mary Daly, took a similar go-slow approach. “Inflation is going to be a bumpy ride” and there is “uncertainty about what the next few months of inflation will look like. The reaction isn’t to make more projections.”
Daly, who also does not have a hawkish reputation, said disinflation could resume with a cooling job market, in which case lowering rates would be appropriate. But she warned that inflation could instead remain stubbornly high, in which case the Fed would need to keep rates higher for longer. So, like many of her colleagues, she urged a cautious, wait and see approach
Meanwhile, questions continued to mount about how “restrictive” monetary policy really is. Minneapolis Fed President Neel Kashkari, in an essay, wrote, “The FOMC has undeniably tightened policy meaningfully, both relative to the pre-pandemic period and to some prior tightening cycles. Nonetheless, it is hard for me to explain the robust economic activity that has persisted during this cycle.”
“My colleagues and I are of course very happy that the labor market has proven resilient, but, with inflation in the most recent quarter moving sideways, it raises questions about how restrictive policy really is,” Kashkari continued. “If policymakers and market participants are misperceiving the neutral policy rate, that could explain the constellation of data we are observing.