MNI: Fed’s Bowman – Hike Rapidly To Get Real Rates Positive

The Federal Reserve should raise rates by 75 basis points in July and by 50 basis points at subsequent meetings in orderly to rapidly move real interest rates into positive territory, Fed Governor Michelle Bowman said Thursday.

“Based on current inflation readings, I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them,” she said in prepared remarks to the Massachusetts Bankers Association.

“I am committed to a policy that will bring the real federal funds rate back into positive territory,” she said.

Bowman said she is concerned by a recent spike inflation expectations.

“When inflation expectations over the longer-term — the next 5 to 10 years —begin to rise, it may indicate that consumers and businesses have less confidence in the Fed’s ability to address higher inflation and return it to the FOMC goal of 2%,” she said.

“If expectations move significantly above our 2% goal, it would make it more difficult to change people’s perceptions about the duration of high inflation and potentially more difficult to get inflation under control.”

UNACCEPTABLY HIGH

MNI reported last week that many former Fed officials believe inflation expectations have already effectively become unanchored. (See: MNI: Inflation Expectations Already Unmoored – Ex-Fed Officials)

“Since inflation is unacceptably high, it doesn’t make sense to have the nominal federal funds rate below near-term inflation expectations,” Bowman said.

Inflation has surpassed the Fed’s worst fears, with CPI rising to a 40-year high of 8.6% in May. The Fed has responded by raising rates ever more aggressively, culminating in a 75 basis point rate increase at its meeting earlier this month. The central bank has also signaled more tightening to come, and the committee projects the fed funds rate will end the year somewhere around 3.4%.

Bowman stressed the U.S. labor market is strong with a historically low jobless rate of 3.6%, but added that labor shortages are likely to persist in part because of depressed labor force participation.

"The tightness of the labor market is exacerbated by a labor force participation rate that remains far below the pre-pandemic benchmark, representing millions of workers sitting on the sidelines," she said.

"While the strong job market has brought some of these workers back into the workforce, it seems that many are still waiting or may not return, meaning that labor shortages will likely persist in many sectors of the economy."