Fed's Bowman said December rate cut was 'last step' in 'policy recalibration'

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Federal Reserve governor Michelle Bowman said Thursday that she could have backed a pause in interest rates last month but supported a cut as the “last step” in the central bank’s “policy recalibration,” becoming the latest Fed official to urge caution about the path forward for monetary policy.

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Her concern is that progress on bringing down inflation looks to be stalling, saying Thursday that she cannot rule out the risk that such a stalling could continue.

“Given the lack of continued progress on lowering inflation and the ongoing strength in economic activity and in the labor market, I could have supported taking no action at the December meeting,” she said in a speech in Laguna Beach, Calif.

Now that the Fed has cut rates by a full percentage point since last September, the level of those rates is closer to Bowman’s estimate of neutral — a reference to the level that is intended to neither boost nor slow economic growth.

“I supported the December policy action because, in my view, it represented the Committee’s final step in the policy recalibration phase,” Bowman said, noting that she now wants “a cautious and gradual approach to adjusting policy.” Bowman opposed the Fed’s first jumbo-sized cut in September.

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Federal Reserve governor Michelle Bowman in 2019. REUTES/Ann Saphir · REUTERS / Reuters

The comments were Bowman’s first since she emerged this week as a possible candidate to become the Fed’s top banking regulator following the surprise exit of Michael Barr, the current vice chair for supervision.

Barr has said he will relinquish that seat by Feb. 28, giving President-elect Donald Trump the chance to influence a key role in the Fed during his early days in office.

Bowman has opposed some of the proposals put forward by Barr, including a new set of controversial capital rules proposed by top bank regulators that would require lenders to set aside greater buffers for future losses.

The requirements are based on an international set of capital requirements known as Basel III imposed in the decade following the 2008 financial crisis.

On Thursday Bowman said again that she prefers a “tailoring” regulatory model that accounts for differences among big and small banks.

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“I am confident that going forward, regulators will return to regulatory tailoring, particularly for community banks with straightforward business models.”

Bowman also underscored the Fed should not prejudge the incoming Trump administration’s future policies until there is more clarity about their impact on the economy, inflation, and the job market.

Some economists are concerned that these trade and immigration policies could make inflation worse.

Some of Bowman’s colleagues are concerned about those policies. Almost all Fed officials agreed at the last December meeting that “upside risks to the inflation outlook had increased” due in part to the “likely effects” of expected changes in trade and immigration policies, according to meeting minutes released Wednesday.

In December, Fed officials reduced their estimate of 2025 rate cuts to two from a previous estimate of four, based in part on elevated inflation concerns.

Several of the participants in that Dec. 18-19 meeting even “observed that the disinflationary process may have stalled temporarily or noted the risk that it could.”

One official, Cleveland Fed president Beth Hammack, objected to the rate cut “in light of uneven progress in returning inflation to 2%” and argued for holding it steady.

Central bank officials will be paying close attention to new inflation data as they prepare for their next meeting on Jan. 28-29 following the inauguration of Trump as president on Jan. 20.

The last reading of the Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) price index — showed an easing to 2.4% in November. That is down considerably from a peak of 7.2% in June 2022 but still above the Fed’s 2% goal.

When excluding volatile food and energy costs, so-called core PCE was down to 2.8% in November — compared with a peak of 5.6% in September 2022.

Many other Fed officials struck a cautious tone about the path forward in new commentary Thursday.

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Kansas City Fed president Jeff Schmid, a voting member this year, said, “I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral.”

Schmid said he is in favor of adjusting rates “gradually,” noting that the strength of the economy allows the Fed to be patient.

However, Schmid sounded more optimistic than Bowman that inflation will continue to move in the right direction. He thinks inflation will continue easing because supply chain disruptions from the pandemic have healed, the job market has cooled, and inflation expectations remain anchored.

FILE PHOTO: Federal Reserve Bank of Kansas President Jeff Schmid looks on as he gets ready to host the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming on August 22, 2024. REUTERS/Ann Saphir/File Photo — Federal Reserve Bank of Kansas President Jeff Schmid at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyo., in 2024. REUTERS/Ann Saphir/File Photo · Reuters / Reuters

Boston Fed president Susan Collins, another voting member this year, also called for a gradual approach.

“With policy already closer to a more neutral stance, I view the current nature of uncertainty as calling for a gradual and patient approach to policymaking,” Collins said.

Collins added that she supported rate cuts in November and December but that the December decision was a closer call.

Collins decided to support the December cut since it offered insurance to preserve a healthy job market while maintaining a restrictive policy stance that is still needed to sustainably restore price stability. Her outlook now is in line with her colleagues’ median forecast for two rate cuts this year.

But Bowman said Thursday that she is concerned that the current policy stance may not be as restrictive as other Fed members may see it. It doesn’t seem likely that interest rates are restraining the economy meaningfully because of its strength, she added.

Philadelphia Fed president Patrick Harker, whose term expires June 30, offered the most dovish commentary of the day. He said in a speech Thursday that inflation is taking longer than thought to get back to the Fed’s 2% goal but that he still expects the Fed to cut rates.

“I still see us on a downward policy rate path,” Harker said. “Looking at everything before me now, I am not about to walk off this path or turn around. But the exact speed I continue to go along this path will be fully dependent upon the incoming data.”

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