Federal Reserve Govs. Michelle Bowman and Lisa Cook say they are cautious of lowering interest rates as inflation remains higher than expected and the labor force continues to be strong.
The Federal Open Market Committee has lowered interest rates three times for a total of 100 basis points since September, to 4.25 to 4.5 percent. GDP grew at a 3.1 percent annual clip in the third quarter of last year, with forecasters expecting 2.5 percent growth in the fourth quarter. The next FOMC meeting is slated for Jan. 28-29. The vast majority of interest rate traders expect the committee will keep interest rates the same, according to CME Group.
Speaking at the University of Michigan Law School, Cook said the economic forecast is more favorable than previously expected. Unemployment increased to 4.2 percent in November from 3.4 percent in April 2023. Though new applications remain relatively low for unemployment benefits, the hiring rate has fallen to below its pace in the years leading up to the pandemic.
“Since September, the labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time,” Cook said. “Thus, I think we can afford to proceed more cautiously with further cuts.”
Speaking Jan. 8 before the California Bankers Association, Bowman said she continues to see upside risks to inflation. Annualized core PCE inflation increased to 2.8 percent in both October and November, slightly under its 3 percent reading at the end of 2023.
“The rate of inflation declined significantly in 2023, but this progress appears to have stalled last year with core inflation still uncomfortably above the Committee’s 2 percent goal,” Bowman said.
“I also continue to be concerned that the current stance of policy may not be as restrictive as others may see it,” she added. “Given the ongoing strength in the economy, it seems unlikely that the overall level of interest rates and borrowing costs are providing meaningful restraint.”
Bowman’s speech also addressed regulations. She called on regulators to focus on banks’ safety and soundness while tailoring rules to the size of community banks. She said much supervisory information is being categorized as “confidential”, keeping it from public scrutiny and making it harder for banks to better understand supervisory expectations. She criticized regulatory proposals to increase capital requirements following the spring 2023 failure of Silicon Valley Bank.
“The process of any reform or change to the bank regulatory framework should begin with an identification of the problem, followed by an analysis of whether proposed solutions are within the agency’s statutory authorities, and an evaluation of whether targeted changes could result in improvements, remediation of gaps, or elimination of redundant and unnecessary requirements,” Bowman said.
Cook discussed the high rate of investment of U.S. firms in artificial intelligence, which she expects will increase productivity. She also expressed concern over the growing stablecoin industry. Cook sees stablecoins that are pegged to a reference asset as being susceptible to runs.
“If a run on a large stablecoin were to occur, liquidation of the assets backing the stablecoin could be disruptive, especially if those assets were linked to other funding markets, like commercial paper or certificates of deposit,” Cook said.