The Federal Reserve remains cautious about the possibility of gradually lowering interest rates, according to Fed governor Michelle Bowman. Speaking to a group of bankers in Hawaii, Bowman stated that the Fed is not yet at the point where rate cuts are warranted.
Bowman's comments come after the Fed's recent decision to keep the benchmark rate unchanged, with 12 top officials voting unanimously in favor. The current rate stands at a range of 5.25% to 5.5%, a level maintained since July.
While Bowman believes that inflation will decline further even with unchanged rates, she also mentioned the potential for another rate hike. She expressed willingness to raise the federal-funds rate at a future meeting if incoming data shows signs of inflation stalling or reversing.
To guide the decision-making process, Bowman highlighted the importance of closely monitoring incoming data, including the upcoming release of revised 2023 inflation data on Feb. 9.
Looking ahead, Bowman emphasized the need for caution when adjusting interest-rate policy. She warned that reducing the policy rate too soon could necessitate additional rate increases in the future to reach the desired inflation target of 2% in the long run.
Bowman also noted several factors that could pose upside risks to inflation. These include ongoing conflicts in the Middle East and continued easing in U.S. financial conditions, which may drive a resurgence in demand and subsequent inflation. Additionally, she highlighted the risk that a tight labor market could lead to persistently high core service inflation.
The recent strong job report for January, which showed an increase in wages, suggests that businesses are still adjusting wages to compensate for inflation, according to Bowman.
In summary, while the Federal Reserve has chosen to hold interest rates steady for now, Bowman's remarks indicate that future rate cuts are still possible. Caution remains paramount as policymakers assess incoming data and weigh potential risks to inflation.
