The only dissenting member of the Federal Reserve speaks out again: must focus on inflation, neutral interest rates much higher than before the pandemic

On Tuesday, Federal Reserve Governor Bowman, who cast the only dissenting vote at the September Federal Reserve meeting, spoke out again. She stated that the Fed should lower interest rates at a moderate pace, believing that the risk of rising inflation still exists and that the U.S. labor market has not shown significant weakness.

Bowman pointed out, "When it comes to the risks facing the dual mandate, I continue to see greater risks to achieving price stability, especially as the labor market continues to approach estimates of full employment."

Bowman's remarks highlight the stark contrast between her and other Fed officials. Most Fed officials recently believe that the risks to maximizing employment and price stability are roughly balanced or lean more towards the risks facing employment.

The Fed initiated its first rate cut in four years last Wednesday, with a rate cut of up to 50 basis points. Only one member of the committee opposed the 50 basis point rate cut, while Fed Governor Bowman supported a 25 basis point rate cut. Bowman became the first Fed governor to cast a dissenting vote since 2005.

Bowman stated that when the Fed began cutting rates, she tended to take a more cautious approach, reflecting several considerations:

In my view, starting a rate cut cycle with a quarter-point decrease will better solidify the strong economic conditions, while also confidently acknowledging the progress we have made towards our goals.

Core inflation (excluding volatile categories such as food and energy) remains uncomfortably above the Fed's 2% target.

By moving towards a more neutral policy stance at a steady pace, we will be better positioned to further bring inflation down to the 2% target, while closely monitoring changes in the labor market conditions.

I will not pay too much attention to recent labor market data until clear trends indicate a significant slowdown in spending growth and labor market weakening. Wage growth indicates that the labor market remains tight, and temporary factors may have led to the recent rise in the unemployment rate.

However, if data shows a significant weakening in the U.S. job market, it will support taking action and adjusting monetary policy as needed while considering the inflation mandate.

Fed Chair Powell emphasized that the larger rate cut aims to maintain a strong labor market, calling it a recalibration to ensure that the Fed does not fall behind.

Bowman stated that she appreciated Powell directly addressing her concerns at the press conference, namely that the 50 basis point rate cut may inadvertently signal concerns about the underlying economic conditions or lead market participants to expect future rate cuts to come quickly.

The latest forecasts show that although the median of the dot plot indicates that Fed officials support a cumulative 50 basis point rate cut at the last two meetings of the year, there is a clear divergence in policymakers' views on the future rate path: out of 19 officials, 7 expect only a 25 basis point rate cut in 2024, with two opposing any further action this year.

Bowman stated on Tuesday that her estimate of the neutral policy rate (the rate level that neither stimulates nor restricts the economy) is much higher than before the COVID-19 pandemic. "If the estimate of the neutral rate is higher, then for any given rate cut pace, we will reach our destination faster." Bauman's estimate of the neutral interest rate also differs greatly from some of her colleagues. On Monday, several senior officials of the Federal Reserve emphasized that the current interest rate level is still far from the neutral rate.

Bauman issued a statement last Friday explaining why she disagreed with the 50 basis point rate cut by the Federal Reserve in September. In the statement, she stated that a significant rate cut could be seen as the Federal Reserve declaring a premature victory in combating high inflation. She prefers to gradually ease the FOMC's monetary policy 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."