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Federal Reserve Governor Michelle Bowman on Friday issued a statement explaining her decision to dissent from the central bank’s decision to cut interest rates by 50 basis points.
The Federal Open Market Committee (FOMC), the Fed’s policymaking arm, lowered its target range for the benchmark federal funds rate from a range of 5.25% to 5.5% to 4.75% to 5%. It cited progress in lowering inflation toward the Fed’s 2% target and noted a strong but softening labor market. Fed Chair Jerome Powell said “we don’t think we’re behind” a potential economic downturn but the move could be viewed as “a sign of our commitment to not get behind.”
Bowman explained in a statement published after the conclusion of the Fed’s “blackout” period that she preferred a smaller 25 basis point cut. A cut of that size was viewed as the most likely course of action by economists polled by LSEG prior to the decision, though interest rate markets increasingly anticipated the larger 50 basis point cut prior to Wednesday.
“The U.S. economy remains strong, with solid underlying growth in economic activity and a labor market near full employment,” Bowman wrote. “Although hiring appears to have softened, layoffs remain low. I see the normalization in labor market conditions as necessary to help bring wage growth down to a pace consistent with 2 percent inflation, given trend productivity growth.”
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“My reading of labor market data has become more uncertain due to increased measurement challenges and the inherent difficulty in assessing the effects of recent immigration flows. I am also taking signal from continued solid growth in the spending data, especially consumer spending, reflecting a healthy labor market,” she added.
Bowman also cited concerns that inflation remains above the Fed’s 2% target rate. The U.S. Department of Labor’s consumer price index (CPI), a popular inflation gauge, was up 2.5% in August from a year ago.
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“Higher prices have an outsized impact on lower- and moderate-income households. Accomplishing our mission of returning to low and stable inflation at our 2 percent goal is necessary to foster a strong labor market and an economy that works for everyone in the longer term,” Bowman wrote.
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Powell had previously signaled that Fed policymakers didn’t need to wait for inflation to reach the 2% target to cut rates if it were continuing to trend in that direction. He said in July that “if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%.”
Bowman said that she viewed moving at a more measured pace with a 25 basis point cut would help with slowing inflation to the 2% target and “would also avoid unnecessarily stoking demand.”
She added that despite her dissent she respects and appreciates her colleagues’ decision and that she remains “committed to working together with my colleagues to ensure that monetary policy is appropriately positioned to achieve our goals of maximum employment and returning inflation to our 2 percent target.”
