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A top Federal Reserve official has backed more rate hikes if inflation remains at current levels. He says immigration and aggressive fiscal stimulus are likely to cause U.S. prices to rise faster than in other wealthy economies.
Michelle Bowman, one of the Fed’s governors and a constituent on the rate-setting Federal Open Market Committee, said she remains “prepared” to raise borrowing costs again “should inflation stagnate or even reverse.”
Bowman’s comments came in a speech in London on Tuesday and highlight the debate within the Fed over whether the bank can start cutting rates this year, or at all before November’s presidential election.
Another Fed governor, Lisa Cook, said in New York on Tuesday that she believed inflation would likely fall “sharper” next year and that it would be necessary to cut rates “at some point” to maintain a healthy balance in the economy.” economy”.
President Joe Biden has made the economy and his efforts to reduce inflation part of his re-election campaign as voters worried about the high costs of fuel, food and other goods, as well as mortgage rates.
US inflation rose to over 7 percent in 2022 as the economy recovered from the Covid-19 pandemic, prompting the Fed to raise interest rates from near zero to 5.25 to 5.5 percent, the highest level in twenty years. Inflation has fallen since then, but remained at 2.7 percent in April, above the central bank’s target of 2 percent.
Bowman is among the most hawkish members of the FOMC — and even she didn’t think a rate hike this year was the most likely scenario. But four of the 19 officials who attended the committee also announced earlier this month that they expect no rate cuts this year.
Another seven expect a cut of just one quarter point, potentially delaying a decision until the Fed’s final meeting of the year in December.
The remaining eight members think two cuts are likely, with several members of the committee saying in the past week that there were signs the U.S. economy was weakening and price pressures were disappearing.
Investors are still betting that the Fed will cut by a quarter point in mid-September, the central bank’s last meeting before the election.
However, Bowman said “upside risks” to inflation remained – including that looser financial conditions and the federal government’s stimulus measures “could boost demand, holding back further progress or even slowing inflation.” accelerate”.
The independent Congressional Budget Office expects the US budget deficit to reach 7 percent of US output this year.
An increase in immigration could also increase housing costs, with construction yet to catch up with demand, Bowman argued.
But Cook said she expected housing-related inflation to ease in 2025, and three- and six-month rates to continue falling this year as consumers become less tolerant of higher costs for goods.
“Several national retailers have announced plans to reduce prices on certain items, and there is increasing evidence that higher-income consumers are switching to discount stores,” she said.
The Fed’s decision to keep rates high for longer comes as G7 counterparts such as Canada and eurozone members – Italy, Germany and France – have started cutting borrowing costs.
Speaking in London, Bowman said it is “possible” that the difference in strategy between the Fed and other central banks will widen in the coming months.
“Inflation and labor market developments in the US have developed differently in recent quarters than in many other advanced economies, likely reflecting more open immigration policies and significantly greater discretionary stimulus since the pandemic,” she said.