Fed Gov. Bowman anticipates rate hike, urges comments on CBDC

Federal Reserve Board Governor Miki Bowman urged bankers to submit comments on the Fed’s digital currency discussion paper. Comments are due May 20. ABA President Rob Nichols interviewed Bowman Feb. 21 at the ABA Conference for Community Bankers.

Federal Reserve Board Governor Miki Bowman told bankers gathered at the ABA Conference for Community Bankers on Monday that taming inflation is the Fed’s top monetary policy priority.

“The main challenge for monetary policy now is to bring inflation down without harming the ongoing economic expansion. Inflation is much too high,” said the former Kansas banker.

“In the near term, I expect that uncomfortably high inflation will persist at least through the first half of 2022. We may see signs of inflation easing in the second half of the year, but there is a substantial risk that high inflation could persist.”

She commented that despite a strong labor market, a labor shortage remains a drag on the economy. “indications are that the Omicron infection surge earlier this year has not left a negative imprint on the economy or slowed job creation,” she said. “I expect to see continued strength in the job market this year, with further gains in employment. Even with the improving labor market, I still hear from businesses that qualified workers are difficult to find, and labor shortages remain a drag on hiring and on economic growth.”

Bowman said she supports an increase in the federal funds rate at the March FOMC meeting, and that she expected additional increases to be necessary down the line. She also said the Fed needs to keep an eye on its balance sheet.

“In the coming months, we need to take the next step, which is to begin reducing the Fed’s balance sheet by ceasing the reinvestment of maturing securities already held in the portfolio. Returning the balance sheet to an appropriate and manageable level will be an important additional step toward addressing high inflation,” she said.

Bowman stressed the importance of innovation in community banking, referring to a recently issued Fed discussion paper on digital currency. She urged bankers to submit comments by the May 20 deadline. She said the Fed already has received 1,000 comments.

ABA President Rob Nichols, who interviewed Bowman on stage after she delivered prepared remarks, said he didn’t see a use case for a Central Bank Digital Currency. “What are your thoughts?” he asked.

“I struggle to find a business case for it,” she said. “We have a safe, stable broadly available banking system in the United States. A CBDC could disintermediate some of that.” She commented further that fintechs are emerging which appear to reduce the need for a CBDC.

In another topic, Nichols asked whether the Fed would take institution size into consideration when asking banks to consider climate change as a risk factor.

“Climate change is not in our mandate,” Bowman said. “Risk management is our concern,” and she said community banks already are managing for such risk.

Speaking on President’s Day, this was the fourth year in a row Bowman has addressed the ABA Conference for Community Bankers.