Fed Governor Michelle Bowman on why she voted against the big interest rate cut
Federal Reserve Governor Michelle Bowman was the sole dissenter at last week’s Federal Open Market Committee vote — the first since 2005. In her view, a 25 basis-point cut would have been a more measured response to current economic conditions.
The central bank voted last week to start its highly anticipated interest rate cutting cycle with an aggressive, 50 basis-point cut that brought the federal funds rate to 4.75-5.0% from more than two-decade highs.
In the committee’s statement following the decision, it said it made the decision to carry out a bigger rate cut as it balanced considerable progress on inflation and rising employment risks.
Bowman has a more sober view of the current economic situation. She said the inflation rate, which came in at 2.5% in August, is still “ uncomfortably above” the Fed’s 2% target. But she also downplayed some of the risks to the economy, particularly when it comes to employment.
“Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5 percent, I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price-stability mandate,” she said in prepared remarks Tuesday.
On the flip side, the larger rate cut could also be seen as a sign that the central bank is perceiving more weakness in the economy than presently exists, according to Bowman. She pointed to still-elevated wage growth, solid consumer spending, and resilient GDP growth as signs the economy is still humming along — even as the labor market cools.
“In the current economic environment, with no clear signs of material weakening or fragility, in my view, beginning the rate-cutting cycle with a 1/4 percentage point move would have better reinforced the strength in economic conditions, while also confidently recognizing progress toward our goals,” Bowman said.
“In my mind, a more measured approach would have avoided the risk of unintentionally signaling concerns about underlying economic conditions,” she added.
She noted that lowering rates too quickly risks unleashing pent-up demand and cash, which would send inflation upward again. Bowman said she continues to see greater risks to price stability going forward, including threats to global supply chains and a surge in housing market activity.
Unemployment, which jumped to 4.3% in July, stayed high at around 4.2% last month. The Fed adjusted its median unemployment rate projection to 4.4% by the end of this year, and to 3.4% at the end of 2025.
The Fed also sees core personal consumption expenditures, its preferred inflation metric, falling to 2.3% this year, from its projected 2.6% in June. It also expects the median for next year to drop to 2.1% from 2.3%, as the Fed continues to guide the economy toward a 2% target rate.
Last week’s decision marked the first time since March 2020 that the Fed cut interest rates, and the first time since 2008 that the Fed delivered a 50 basis-point rate cut since the 2008 global financial crisis.
Business leaders and analysts have praised the decision to kick off the rate cutting cycle with an aggressive cut. Minneapolis Federal Reserve President Neel Kashkari said Monday it was the “right decision,” reiterating the Fed’s view that the risk has shifted away from inflation and toward the labor market.
