Federal Reserve Governor Michelle Bowman said on Tuesday she remained cautious about any shift in the Fed's policy as she saw upside risks to inflation and warned that an overreaction to any single data point could jeopardize the progress that has been made.
Bowman, speaking in prepared remarks to a gathering of bankers in Alaska, reflected that she remains one of the Fed’s more hawkish policymakers.
While she stopped short of saying, as she has before, that she stood ready to raise rates further if necessary, she gave little indication that she was ready to back a rate cut at the Fed’s Sept. 17-18 meeting, which is widely expected.
She said that under the current policy stance, inflation should continue to decline, and if inflation continues to decline toward the Fed's 2% objective, "gradual reductions in the federal funds rate would be appropriate to prevent monetary policy from becoming unduly restrictive on economic activity and employment."
But “we need to remain patient and avoid overreacting to any one data point and undermining the continued progress we have made in reducing inflation,” Bowman said, an apparent reference to the shift in priorities among several Fed officials after the July jobs report showed hiring slowed and the unemployment rate rose to a high of 4.3%.
She said inconsistencies in the latest jobs report are cause for alarm, and while last year’s hiring strength may have been exaggerated, it’s also possible that the rise in the unemployment rate overstates the extent to which the labor market is cooling.
“Measurement challenges have grown over the past few years, and the frequency and magnitude of data revisions have increased, making the task of assessing the current state of the economy and forecasting how it will perform more challenging,” Bowman said.
"I would be cautious in considering any adjustments to the current policy stance," she said.
Financial markets now fully expect the Fed to cut its benchmark interest rate next month from its current range of 5.25%-5.50%, which has remained unchanged since July 2023. The question is the size of the first rate cut, with markets currently favoring a 25 basis point cut rather than a 50 basis point cut.
Fed Chairman Jerome Powell is expected to reinforce his view on Friday at the Jackson Hole conference that credit conditions are about to start easing after tamping down the worst outbreak of inflation in 40 years. Fed policymakers hope the rate cuts come in time to complete what has so far been a textbook “soft landing” of slowing inflation without a sharp rise in unemployment.