Michelle Bowman, a member of the Federal Reserve Board, said on Tuesday at an event hosted by a London think tank that she does not expect any interest rate cuts before the end of this year.
In her speech, Bowman pointed out that significant progress has been made in slowing inflation in 2023, but this progress has stalled in the first half of 2024. She said it is currently impossible to predict what will happen next.
She said: "Inflation in the United States is still high, and I still see many rising inflation risks that affect my expectations. First of all, further improvement on the supply side is unlikely to continue to reduce inflation, as supply chains have basically stabilized and labor force participation rates have been stable in recent months, lower than pre-pandemic levels. The open immigration policy that has added millions of new immigrants to the United States in the past few years may also become stricter."
Bowman also pointed out that the recently relaxed financial conditions in the United States and unexpected geopolitical disruption abroad may also increase inflation. At the same time, due to nationwide housing shortages, housing costs are unlikely to decline.
Bowman is a voting member of the Federal Open Market Committee (FOMC), which is responsible for monetary policy decisions at the Federal Reserve. Since 2018, she has been a member of the Board of Governors of the Federal Reserve System. She said that it will take longer for the current interest rate level to ease price increases. "My basic expectation is still that US inflation will return to the FOMC's 2% target, while the federal funds rate target range will remain at the current 5.25% to 5.5% level for a period of time. If the upcoming data shows that inflation is sustainably moving towards our 2% target, then eventually appropriately gradually lower the federal funds rate to prevent monetary policy from becoming too tight. However, we are not yet at the point where it is appropriate to lower the policy rate."
She also pointed out that acceleration in inflation could bring rate hikes back into the discussion. "If inflation progress stalls or even reverses, I am still willing to raise the federal funds rate target range at future meetings. Early or rapid reduction of our policy rate may lead to inflation rebounding, and further policy rate increases may be necessary in the future to restore inflation to 2% in the long run."
Since July 2023, the FOMC has maintained the federal funds rate target range at 5.25% to 5.5%. On Monday, the futures prices of interest rate futures showed that there is a close to 70% chance that the committee will reduce the target by a quarter of a percentage point at its September meeting. Futures show that there is the greatest chance that rates will be lowered twice by the end of 2024.
On the same day, another Fed governor, Lael Brainard, expressed optimism about the continued progress the US has made in lowering inflation this year, which could open the door to lower rates. But she also pointed out that this may not happen. She is watching for signs of rising inflation expectations, which could keep the Fed's rates unchanged for a longer period of time, or further cooling of the labor market, which could hasten the timeline for lowering rates.
In her speech at the New York Economic Club on Tuesday, she said: "As inflation progresses significantly and the labor market cools gradually, it will be appropriate to lower the policy restriction level to maintain the health balance of the economy. The timing of any such adjustments will depend on the development of economic data and its impact on economic prospects and risk balance."
Brainard is a voting member of the Federal Open Market Committee (FOMC) and has served on the Board of Governors of the Federal Reserve System since May 2022.
She noted that if sustained price increases led to an increase in long-term inflation expectations, rates may need to be kept in the restrictive zone for longer. On the other hand, if the pace of economic and labor market decline outpaces expectations, it could mean that the Fed will further ease policy.
The Personal Consumption Expenditures (PCE) price index is the Fed's preferred measure of inflation. After annual increases of more than 7% in 2022, the index fell below 3% in the fourth quarter of last year. And so far, progress in reducing inflation has stalled in 2024: the PCE price index in April rose 2.7% year-on-year. May data will be released on Friday.
Brainard said she expects further declines in inflation, but pointed out that the inflation rate for certain categories such as housing will stubbornly remain higher than the Fed's annual target of 2%. As the improvement on the supply chain, commodity inflation has fallen, and most scattered data shows that consumers are resisting price hikes and may choose cheaper alternatives.
She focuses on monthly inflation rates rather than year-on-year rates, as comparisons for the remainder of 2024 may become challenging compared to the lower inflation reading in the autumn of last year.
She said: "My forecast is that as consumers' resistance to price hikes is reflected in inflation data, the inflation rates for three and six months will continue to decline on a bumpy path. I expect 12-month inflation to remain roughly the same for the rest of this year, and monthly data may resemble favorable readings in the second half of last year.
Regarding the Fed's other dual mandate of ensuring price stability and maximum employment, Brainard said she believed the labor market was "tight but not overheated." She pointed out that the ratio of job vacancies to unemployed workers is returning to pre-pandemic levels; the rate of people leaving their jobs is declining; and wage growth is also slowing.
Brainard is optimistic about corporate investment in intellectual property, software, and other new equipment translating into higher productivity for employees in the future.
She said, "Productivity growth is volatile and difficult to measure, but if it remains strong, faster economic growth rates may not trigger inflation. I believe that the adoption of AI technology is a potential important source of productivity growth. It is important to remember that breakthroughs such as effective generative AI take time to fully realize their potential and spread throughout the economy and require additional investment to take effect."
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