Federal Reserve Gov. Michelle Bowman expects the Fed will soon slow the pace of interest rate hikes as inflation falls and the economy weakens due to rising interest rates.
Inflation as measured by Personal Consumption Expenditures was at 7.7 percent in October, less than the 8.2 percent in September but still well above the Federal Reserve’s long-term goal of slightly more than 2 percent. So far this year, the Fed Funds rate has increased from near-zero to 3.75 to 4.0 percent, including raising interest rates by 0.75 percent in each of the last four meetings, to reduce consumer demand.
Bowman said she is “more comfortable considering stepping down to a 50-basis-point hike” at the Federal Open Market Committee’s next meeting. She won’t make a decision until seeing more data, including the next PCE inflation and jobs reports, she noted in prepared remarks Nov. 17 before a public meeting.
Bowman said the terminal interest rate will depend on when the Fed meets its inflation goal. She expects the FOMC will meet its terminal rate well before inflation falls to 2 percent because of the lag time between when rate changes happen and when their impact is felt in the economy.
“When the Fed was faced with rapidly escalating inflation and a strong labor market, it lifted rates aggressively off the effective lower bound including several 75-basis-point steps,” Bowman said. “But as the policy rate gets higher, the stronger is the case for slowing the rate of ascent while continuing to climb. This would correspond to slowing to 50-basis-point hikes.”
Bowman said she remains relatively optimistic as supply chain bottlenecks ease and high inflation mainly continues to reflect consumer demand. The housing sector has especially slowed over the last year as levels of new home construction and new and existing home sales have fallen after growing both before and during the pandemic.
The labor market remains tight, Bowman noted, as there remain nearly two job vacancies for every job seeker in what was a strong labor market even before the pandemic. Wages have been increasing more rapidly than in decades, a pace that has slowed so far this year.
“Consumer and business spending has softened, amid deteriorating business sentiment in most sectors of the economy and near-record-low readings on surveys of consumer attitudes about the economy,” she added.