Further rate hikes may be needed if inflation remains high

Federal Reserve Governor Michelle Bowman said on Friday that it is possible that further rate hikes may be needed to control inflation, rather than the cuts that her colleagues have indicated are likely and that the market is expecting.

Bowman noted a number of potential upside risks to inflation and said policymakers must be careful not to ease policy too quickly.

“While it is not my baseline view, I continue to see the risk that at a future meeting we may need to raise the policy rate further if inflation stalls or even reverses,” she said in prepared remarks for a speech to a group of Fed watchers in New York. “Cutting our policy rate too early or too quickly could result in a rebound in inflation, requiring further future policy rate increases to bring inflation back to 2% over the longer term.”

As a member of the Board, Bowman is a permanent voting member of the Federal Open Market Committee that sets the rate. Since taking office at the end of 2018, her public speeches have placed her on the more hawkish side of the FOMC, meaning she advocates a more aggressive stance to contain inflation.

Bowman said her most likely outcome remains that “it will eventually become appropriate to cut” interest rates, although she noted that “we are still not at the point” of cutting because “I continue to see a number of upside risks to inflation.”

The speech, to the Shadow Open Market Committee, comes with markets in the lead on the near future of Fed policy. Statements this week from several officials, including Chairman Jerome Powell, have indicated a cautious approach to cutting interest rates. Atlanta Fed President Raphael Bostic, an FOMC voter, told CNBC that he likely sees only one rate cut this year, and Minneapolis Fed President Neel Kashkari indicated that no cuts could happen unless inflation slows further.

Futures traders are pricing in three cuts this year, although it has become a close call between June and July for when they start. FOMC members in March also penciled in three cuts this year, although an unidentified official in the “dot plot” indicated no reductions until 2026 and there was considerable dispersion otherwise about how aggressively the central bank would move.

“Given the risks and uncertainties regarding my economic outlook, I will continue to look at the data carefully as I assess the appropriate path for monetary policy, and I will remain cautious in my approach to considering future changes in the stance of policy,” Mr. Bowman said.

Weighing the inflation risks, she said that supply-side improvements that helped bring down the figures this year may not have the same effect going forward. In addition, she mentioned geopolitical risks and fiscal stimulus as other upside risks, along with stubbornly higher house prices and a tight labor market.

“Inflation readings over the past two months suggest that progress may be uneven or slower going forward, especially for core services,” Bowman said.

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