The Federal Open Market Committee should remain cautious about lowering interest rates due to the strong condition of the economy and lingering inflation risks, said Federal Reserve Govs. Michelle Bowman and Christopher Waller during recent speeches.
Bowman delivered her address Feb. 17 during the American Bankers Association Conference for Community Bankers in Phoenix. Her speech came after the FOMC kept interest rates at 4.25 to 4.5 percent in January.
In September, the FOMC reduced interest rates for the first time since 2020, 50 basis points to 4 3/4 to 5 percent. Bowman voted against the interest rate cut, the first time a Fed governor dissented on a rate decision in nearly 20 years. After a 25-basis point cut last fall, the FOMC maintained the federal funds target range at 4 1/4 to 4 1/2 percent in January.
Bowman said pausing interest rates allows for greater clarity on the Trump administration’s policies and their impact on the economy. “I supported this action because, after recalibrating the policy rate by 100 basis points through the December meeting, I think that policy is now in a good place, allowing the committee to be patient and pay closer attention to the inflation data as it evolves,” Bowman added.
Bowman was optimistic on the state of the U.S. economy, describing it as “strong, with solid growth in economic activity and a labor market near full employment.” She expects inflation will continue to fall this year: Core personal consumption expenditures inflation dropped to 2.8 percent in December, lower than 3.0 percent at the end of 2023.
Speaking the same day during an economic workshop in Australia, Waller said progress on taming inflation remains uneven. He is comfortable waiting to see whether the higher inflation readings last month moderate, as has happened in the past couple of years.
“The current setting of monetary policy is restricting economic activity somewhat and putting downward pressure on inflation,” he said. “If this winter-time lull in progress is temporary, as it was last year, then further policy easing will be appropriate. But until that is clear, I favor holding the policy rate steady.”
Bowman also called for changes to regulatory bank oversight. She took issue with current supervisory practices, saying they lack the procedural restraints regulators face. “The greater flexibility afforded in the supervisory process can lead to poor outcomes, often caused by the temptation to use inaction and opacity as supervisory tools,” she said. “In my view, these tools, inaction and opacity, are not appropriate and must be subject to appropriate scrutiny or purged from the toolkit altogether.”
Bowman said it is difficult to have a full glimpse of supervisory information based on available data, citing the abundance of confidential supervisory information. Changes in supervisory expectations often came without published rulemaking, advance notice or guidance, Bowman noted.
She also suggested creating a specialized resource for reserve banks to navigate the pre-filing conversations with de novo applicants. “We should have clear standards of review and approval — and coordinated actions — among the state and federal regulators involved in any application,” she said. “This should include clear timelines for the point at which a regulator forfeits their opportunity to object due to inaction, delay or stalling tactics.”