MNI: Fed’s Bowman Sees Sizable Hikes If Inflation Doesn’t Ebb

The Federal Reserve should keep hiking interest rates aggressively unless unacceptably quick inflation shows signs of receding, and policy must remain tight for a while after that, Governor Michelle Bowman said Wednesday.

“If we do not see signs that inflation is moving down, my view continues to be that sizable increases in the target range for the federal funds rate should remain on the table,” she said in prepared remarks to the Money Marketeers of New York University.

The Fed has hiked 300bps since March and is expected to move 75bps for a fourth straight meeting in November. CPI figures due Thursday are expected to show core inflation matching a cycle high of 6.5% and headline price gains holding at 8.1% on the year.

“If inflation starts to decline, I believe a slower pace of rate increases would be appropriate,” Bowman said, adding that decisions would be made on a meeting-by-meeting basis.

“To bring inflation down in a consistent and lasting way, the federal funds rate will need to move up to a restrictive level and remain there for some time,” she said. “It is not yet clear how high we will need to raise the federal funds rate and how much time will pass before we begin to see inflation moving back down in a consistent and lasting way.” (See MNI INTERVIEW: Fed May Hike More Than FOMC Says--Blanchard)

FORWARD GUIDANCE LESS USEFUL

Bowman said forward guidance is less useful as a policy tool today than it was through the 2008 financial crisis.

“Given that the federal funds rate is now well above zero, the FOMC can communicate changes in the stance of monetary policy through changes in the target range for the federal funds rate and not rely on explicit forward guidance as it did when the federal funds rate was at the effective lower bound,” Bowman said.

“The costs and risks of providing explicit forward guidance are now higher than they were in the decade that followed the last financial crisis.” she said.

The best guidance FOMC members can provide at the moment is "we should continue to reiterate that we will remain 'highly attentive to inflation risks,'" Bowman said. Minutes from the September Fed meeting echoed that message, showing little sign of a policy pivot and maintaining a strong emphasis on the fight against inflation.