Fed Governor Bowman: Ongoing Rate Increases Necessary to Fight Unacceptably High Inflation

Michelle Bowman, governor of the US Federal Reserve, speaks during a Fed Listens event in
Al Drago/Bloomberg via Getty Images

The Federal Reserve is likely to have to keep raising interest rates to a “sufficiently restrictive level” to bring down inflation, Federal Reserve Governor Michelle Bowman said Monday.

“I expect that ongoing increases will be appropriate to bring the federal funds rate to a sufficiently restrictive level and that it will need to remain there for some time to restore price stability,” Bowman said in a speech at a community banking conference in Florida.

Bowman is the latest Fed official to indicate that the Fed still has multiple rate hikes ahead before it pauses to see how the hikes have affected the U.S. economy. Fed officials, along with many economists, believe monetary policy influences the economy with “long and variable” lags.

“We are still far from achieving price stability, and I expect that it will be necessary to further tighten monetary policy to bring inflation down toward our goal,” Bowman said. Doing so will likely lead to subdued growth in economic activity and some softening in labor market conditions. While there are costs and risks to tightening monetary policy to lower inflation, I see the costs and risks of allowing inflation to persist as far greater. Restoring price stability is essential to support a sustainably strong labor market.”

The market in fed funds futures, which allow traders to speculate on the central bank’s rate target, currently indicates a 90 percent chance of a 25 basis point hike in March and around a 75 percent chance of another hike in May, which would be the second and third hikes this year. In the week and a half since the Fed’s last meeting, the odds of fourth hike have been rising and are currently around 40 percent. The market puts very low odds of further hikes. Indeed, the futures prices imply a good chance of a cut by the end of 2023.

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