In a historic move, Federal Reserve Governor Michelle W. Bowman dissented from the majority decision on Friday, advocating for a more measured 25-basis-point interest rate cut instead of the larger 50-basis-point reduction supported by the majority of the Federal Open Market Committee (FOMC). This marked the first time since 2005 that a Fed governor openly disagreed with a rate decision, signaling a growing divide within the central bank on how to address the ongoing issue of inflation.
Bowman’s stance was rooted in her concerns about inflation remaining stubbornly above the Fed’s 2% target. She argued that a gradual approach to a neutral monetary policy stance would be more appropriate given the current economic conditions. She emphasized that a return to normalcy in the labor market is crucial to bring down wage growth to a level consistent with the 2% inflation goal.
“The normalization in labor market conditions is necessary to help bring wage growth down to a pace consistent with 2 percent inflation,” Bowman stated.
Bowman also cautioned against a premature declaration of victory over inflation, arguing that aggressive rate cuts could undermine the Fed’s broader objectives. She pointed to the persistent high levels of core personal consumption expenditures prices, which remain above the 2% target, as evidence that the fight against inflation is not over.
“We have not yet achieved our inflation goal,” she said.
Bowman’s perspective contrasted sharply with that of Fed Governor Christopher Waller, who expressed a more optimistic outlook on inflation. Waller believes inflation is easing faster than anticipated and anticipates the August Personal Consumption Expenditures monthly inflation rate to be around 0.1%, potentially bringing the 12-month annualized rate below 2%.
“Inflation is softening much faster than I thought it was going to,” Waller told CNBC.
Waller’s view led him to support a larger 50-basis-point rate cut, which he felt was justified by the current economic data. He indicated that if future economic data aligns with expectations, he would support a 25-basis-point cut but would be open to deeper cuts if inflation continues to undershoot expectations.
The Fed’s remarks on Friday had a limited impact on the markets, with both the dollar and Treasury yields remaining relatively stable. However, the U.S. stock market closed lower on Friday, with the S&P 500 index down 0.6%. Gold prices reached new all-time highs above $2,600 per ounce.
