Federal Reserve Governor Michelle Bowman suggested Monday the central bank could raise interest rates at a faster pace than in previous cycles, as inflation remains “much too high.”
In a Monday speech to a convention of bankers, Bowman said she supported raising rates when the Fed’s monetary policy panel — the Federal Open Market Committee (FOMC) — meets March 15-16. She added she will be “watching the data closely to judge the appropriate size of an increase,” opening the door to a larger-than-typical rate hike.
“My intent would be to take forceful action to help reduce inflation, bringing it back toward our 2 percent goal, while keeping the economy on track to continue creating jobs and economic opportunity for Americans,” Bowman said at the American Bankers Association Community Banking Conference in California.
The FOMC is almost certain to raise interest rates next month — almost two years to the day since it slashed its baseline interest range to 0 to 0.25 percent as the emerging COVID-19 pandemic roiled the economy. While the Fed usually hikes or cuts interest rates in 0.25 percent increments, some investors expect the bank to raise rates by 0.5 percentage points in March.
“Between now and then, it’s very important that we continue to watch how the economy develops, and understand whether or not things are improving or getting worse as we’re approaching that decision,” Bowman said during a question and answer session with American Bankers Association President and CEO Rob Nichols following her speech.
“At this point, I think it’s too soon to tell, but … as I mentioned in my remarks, I am supportive of beginning that rate increase process.”
The Fed will soon receive pivotal inflation data that could influence the size of a March rate hike.
The Commerce Department will release data Friday on January price changes as measured by the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation. While the Fed aims to keep inflation at an annual average of 2 percent, yearly inflation hit 5.8 percent in December, according to the PCE price index.
The Fed declined to raise rates last year as inflation rose despite pressure from some policymakers and investors to begin pulling back stimulus. Fed Chair Jerome Powell and other top officials, along with many private sector economists, said they expected inflation to slow as pandemic-related supply chain issues and labor shortages began to ease and did not want to derail the recovering economy.
Even so, prices continued to climb and inflation spread from goods most directly affected by supply chain dysfunction — such as automobiles, consumer technology and appliances — into basic staples such as food, shelter and energy.
While all FOMC members unanimously supported holding off on rate hikes, Bowman indicated some uneasiness with how long it had taken the bank to begin pulling back stimulus.
“Unfortunately, we’ve seen inflation rising at a faster pace than I think many had expected. As I mentioned in my remarks, it hasn’t surprised me,” Bowman said. “It was an expectation of something that could happen and as such, it’s more than time for us to begin the process of normalizing our monetary policy stance.”
The Fed took its first steps toward ending crisis-level stimulus in November when it began tapering monthly bond purchases initiated in March 2020. Bowman said the Fed is “finally” on track to end those purchases next month and should begin reducing its holdings soon after.
Other FOMC members have expressed concerns about raising rates and allowing bonds to roll off their balance sheet too quickly. John Williams, president of the Federal Reserve of New York, said Friday that he supports raising rates by 0.25 percentage points and reducing the Fed’s bond holdings “steadily and predictably.”
Even so, Bowman expressed confidence the U.S. economy was strong enough to handle a much faster series of rate increases in balance sheet runoff.
After slashing rates near zero in 2008, the Fed did not begin hiking interest rates for another seven years. The FOMC raised rates for the first time since the recession in December 2015, when the unemployment rate was 5 percent, and did not hike again until December 2016.
The unemployment rate as of January was 4 percent, and Bowman said the record levels of demand for labor, strong consumer spending and rising wages gave the U.S. ample strength to handle faster hikes.
“We have a much stronger economy. We have a very tight labor market. We have a high quit rate,” Bowman said. “It’s time for us to be given that process of normalizing our policy rates so that so that we’re trying to address some of those inflation pressures.”