(Reuters) – Federal Reserve Governor Michelle Bowman softened her usually hawkish tone on Saturday, noting that there had been further “welcome” progress on inflation in recent months but saying inflation was still “uncomfortably above” the central bank’s 2 percent target and was subject to upside risks.
“Should incoming data continue to show inflation moving sustainably toward our 2 percent target, it will be appropriate to gradually lower the federal funds rate to avoid making monetary policy too restrictive for economic activity and employment,” Bowman said in remarks prepared for a closed-door meeting of the Kansas Bankers Association. “But we must be patient and avoid undermining the ongoing progress in lowering inflation by overreacting to a single data point.”
The Fed kept its policy rate at the same 5.25%-5.50% range it has been at for more than a year in late July, but signaled that a rate cut could come as early as September if inflation continues to cool. Inflation, as measured by the Fed’s target measure — the year-over-year change in the consumer price index — fell to 2.5% in June.
Bowman’s comments did not prevent a rate cut next month. In fact, she noted that the Fed will have additional economic data by its September meeting, as well as a better sense of how recent financial market volatility may affect the economic outlook.
Bowman also did not repeat her previous statements that she is prepared to raise rates at a future Fed meeting if necessary.
Still, she remains cautious within the Fed’s policy-making committee as the time for a rate cut approaches.
Bowman reiterated her expectation that inflation will continue to fall with unchanged monetary policy. However, she also expressed skepticism about whether price pressures will decline as quickly this year as they did last year.
While she said the risks to the Fed’s two goals of price stability and full employment are better balanced, she indicated she remains more concerned about inflation.
The rise in the unemployment rate in July, to a nearly three-year high of 4.3%, “may exaggerate the extent of the labor market cooling,” she said, pointing to low layoffs and the likelihood that Hurricane Beryl temporarily slowed job growth.
Meanwhile, she said, risks such as geopolitical tensions threaten to push prices higher. “With some upside risks to inflation, I still see the need to pay close attention to the price stability side of our mandate, while we watch for risks of a material weakening in the labor market,” she said.
(Reporting by Ann Saphir; Editing by Leslie Adler)
