Fed Governor Bowman explains dissenting vote: Concerned about inflation, 50 basis points may be seen as premature declaration of victory over inflation

The Federal Reserve initiated its first rate cut in four years this Wednesday, with a substantial 50 basis point reduction. Among the voting members, only one opposed the 50 basis point cut, while Federal Reserve Governor Bowman supported a 25 basis point cut. Bowman became the first Federal Reserve Governor since 2005 to vote against a decision.

Regarding the highly debated single dissenting vote in the market, Bowman spoke out on Friday, explaining why she dissented against the 50 basis point rate cut by the Federal Reserve in September.

In her statement, Bowman stated that a significant rate cut could be seen as the Federal Reserve prematurely declaring a major victory in combating high inflation. She prefers to gradually ease the FOMC's monetary policy in a cautious manner to avoid reigniting consumer demand. "I believe that moving cautiously towards a more neutral policy stance will ensure further lowering the inflation rate to the 2% target."

Bowman pointed out that consumer spending in the United States continues to grow steadily, and high inflation remains a concern.

Federal Reserve meetings rarely encounter dissension, especially during Powell's tenure as Federal Reserve Chairman. The Federal Reserve Chairman typically seeks consensus on decisions, sometimes reaching compromises to avoid public dissent as it could be seen as undermining their credibility.

Commentators noted that Bowman had been cautious about slowing inflation. She held this view until a month ago. In a speech on August 20th, she stated that price increases were still above the Federal Reserve's 2% target, indicating that rate cuts should be gradual.

Divergent Views on Inflation by Two Federal Reserve Governors

On Friday, two influential officials at the Federal Reserve - Governors Bowman and Waller - both expressed support for rate cuts, but they had starkly different interpretations of inflation.

Bowman's statement on inflation is as follows:

The 50 basis point rate cut this week may be seen as a premature signal of the Federal Reserve's victory over inflation. I believe that gradually adjusting monetary policy to a neutral stance in a restrained manner can ensure further return of the inflation rate to the 2% target level.

Federal Reserve Governor Waller's statement on inflation on the same day is as follows:

Waller pointed out that inflation data, rather than concerns about the labor market, were the reasons for his support for lowering rates by 50 basis points this week.

Waller cited recent CPI and PPI data, which showed that the Federal Reserve's preferred inflation measure - core inflation excluding food and energy - has been below 1.8% over the past four months, while the Federal Reserve's target is an annual inflation rate of 2%.

This has surprised me a bit, the speed of the decline in inflation is much faster than I expected, which makes me have to say, look, I think a 50 basis point rate cut is the right move.

Full Text of Bowman's Statement

On Wednesday, September 18, 2024, I dissented from the Federal Open Market Committee's (FOMC) decision to lower the federal funds rate target range by 0.5 percentage points to 4.75%-5%. As indicated in the post-meeting statement by the Committee, I favored lowering the federal funds rate target range by 0.25 percentage points to 5%-5.25%.

Given the progress we have made since mid-2023 in reducing inflation and cooling the labor market, I agree that it is appropriate to readjust the level of the federal funds rate at this meeting and begin moving towards a more neutral policy stance. However, in my view, a smaller first step would be a better course of action in this process Strong U.S. Economy

The U.S. economy remains strong, with economic activity growing steadily and the labor market approaching full employment. While hiring appears to have weakened somewhat, the rate of layoffs remains low. I believe that given the trend of productivity growth, normalizing the labor market conditions is necessary to help bring wage growth down to a pace consistent with a 2% inflation rate. Due to increasing challenges in measurement and the inherent difficulties in assessing the recent impact of immigration flows, my interpretation of labor market data has become more uncertain. I also take signals from expenditure data, particularly the sustained robust growth in consumer spending, which reflects the health of the labor market.

Concerns Remain Despite Progress in Inflation

The inflation rate remains above our 2% target, as core personal consumption expenditure prices have risen by over 2.5% compared to 12 months ago. Higher prices disproportionately affect low- and middle-income families. Achieving our goal of returning inflation to a low and stable 2% level is necessary for promoting a strong labor market in the long term and an economy that benefits everyone.

While we need to recognize that meaningful progress has been made in reducing the inflation rate, with core inflation still hovering around 2.5% or higher, I believe that larger-scale policy actions by the committee may be interpreted as prematurely declaring victory in our price stability mandate.

We have not yet achieved our inflation target. I believe that moving towards a more neutral policy stance at a moderate pace will ensure further reduction of the inflation rate to the 2% target. This approach can also avoid unnecessarily stimulating demand.

Common Future Goals

While I held a different view at the recent meeting, I respect and appreciate my colleagues' inclination to make a significant downward adjustment to the policy rate target range. I remain committed to working together with my colleagues to ensure that monetary policy is in the right place to achieve our maximum employment goal and bring the inflation rate back to the 2% target