Michelle Bowman, Vice Chair for Supervision of the Federal Reserve, continues to be in favor of three cuts in interest rates by the end of the year, after at the beginning of the month he publicly expressed his dissent from the other voting members of the Federal Open Market Committee (FOMC) for the decision to leave the reference rates unchanged in the last meeting. So far this year, the FOMC has maintained the objective interval for the reference interest rate between 4.25% and 4.5%.
“With the slowdown of economic growth this year and the signs of a less dynamic labor market that are outlining themselves, I consider it appropriate to begin to gradually move our moderately restrictive monetary policy towards a neutral level,” he said in an intervention at the Kansas Bankers Association in Colorado, adding that to intervene at the last meeting “would have allowed to protect itself proactively from the risk of an additional erosion of the working market conditions and of a further weakening of economic activity “.
Inflation and mandate
According to Bowman, the tendency of PCE Core inflation seems to approach much more to the 2% objective of what is currently shown by the data. With the inflation of services for housing construction in a supported descendant trajectory and the inflation of other basic services already in line with an inflation of 2%, only the inflation of the cross -country goods remains high, probably due to a limited transmission of the duties.
“In terms of risks to achieve our double mandate, as I acquire greater trust in the fact that the duties will not represent a persistent shock for inflation, I see that the risks to the rise for price stability have decreased – he underlined – with the background inflation on a trajectory supported towards 2%, the weakness of aggregate demand and signs of fragility of the labor market, I believe that we should focus on the risks our employment mandate “.
“With the still alive memory of the lack of labor due to the pandemic, the companies have chosen to maintain, instead of reducing their workforce in response to economic slowdown – he added – and seem more willing to reduce the margins of profit, since they are less able to completely absorb the highest costs and to increase prices, given the weakness of the demand. If the conditions of demand continue to weaken, the companies may have to start off Recognizing that it may not be so difficult to summarize it, given the change in the conditions of the labor market “.
The impact of duties
As for commercial policy, Bowman explained that foreign suppliers are absorbing part of the new duties and importers are moving towards sources with lower rates. Economic stagnation should also allow limited one -off effects on prices this year and very few, if not null, effects of “second joke” on inflation in the medium term. “I also expect that less restrictive regulations, taxes on lowest companies and a more favorable entrepreneurial context can stimulate the offer and compensate for any tariff effects on economic activity and prices in the medium term”, highlighted.
“Since the increases in the prices related to the duties probably represent a one -off effect, I believe that inflation will return to 2% once these effects have dissipated – he said in his intervention – since the changes in monetary policy require time to be felt in the economy, it is appropriate to consider temporarily high inflation data and therefore remove some political restrictions to avoid a weakening of the labor market”.
The management of rates
Aware of the change in economic conditions, Bowman believes that starting to gradually move our reference rate towards its neutral level will help maintain the labor market close to full employment and ensure regular progress towards achieving our double mandate. “I see the risk that a delay in the adoption of measures may result in a deterioration of the conditions of the labor market and a further slowdown in economic growth,” he said.
Before the next September meeting, the Fed will receive a series of additional data and economic information, including another employment report and two on inflation. “A proactive approach to bringing monetary policy closer to neutrality, with respect to the current moderately restrictive orientation, would help avoid further useless erosion of the labor market conditions and would reduce the possibility that the committee must implement a wider correction of monetary policy in case of further deterioration of the labor market,” said Bowman.
“My summary of the economic projections includes three cuts for this year, in line with my predictions since last December, and the latest data on the labor market strengthen my opinion – he concluded – I would like to reiterate, however, that monetary policy does not follow a predefined path. At each meeting of the FOMC, I and my colleagues will take our decisions on the basis of each of our incoming data and implications Perspectives, guided by the double -mandate objectives of the Fed maximum employment and stable prices “.
