Rate cuts needed if inflation continues to decline: Fed

Federal Reserve Governor Michelle Bowman on Saturday slightly softened her typically hawkish tone, noting some “welcome” progress on inflation over the past two months, though she said inflation remains “uncomfortably above” the central bank’s 2 percent target and subject to upside risks.

“If new data continue to show that inflation is moving sustainably toward our 2 percent objective, it will be appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive on economic activity and employment,” Bowman said in remarks prepared for a closed-door meeting of the Kansas Bankers Association.

“But we need to be patient and avoid undermining continued progress in reducing inflation by overreacting to a single piece of data,” he added.

In late July, the Federal Reserve kept its policy rate at 5.25 to 5.50 percent, as it has done for more than a year, but signaled it could cut it in September if inflation continued to cool.

Inflation, as tracked by the Fed, the annual change in the personal consumption expenditures price index, slowed to 2.5 percent in June.

Bowman’s comments do not rule out a rate cut next month. In fact, he noted that at its September meeting the Fed will have additional economic data, as well as a better sense of how recent volatility in financial markets may affect the economic outlook.

Bowman also did not reiterate her assertion from previous speeches that she remains willing to raise rates at a future Fed meeting if necessary. But she remains a voice of caution on the Fed’s policy-making committee, which is nearing an interest rate cut.

While Bowman reiterated that her baseline outlook is for inflation to continue to decline with stable monetary policy, she was skeptical that price pressures would ease as quickly this year as they did last year.

And while she said the risks to the Fed’s two goals — price stability and full employment — were becoming more balanced, she said she remained more concerned about inflation.

The rise in the unemployment rate in July to 4.3 percent, a nearly three-year high, “may be overstating the degree of cooling in labor markets,” he said, pointing to a low level of layoffs and the likelihood that Hurricane Beryl temporarily slowed job growth.

Meanwhile, he said, risks, including geopolitical tensions, threaten to push prices higher still. “With some upside risks to inflation, I continue to see the need to pay close attention to the price stability aspect of our mandate, while keeping an eye on the risks of a material weakening of the labor market,” he explained.