Federal Reserve Governor Michelle Bowman expressed her belief that her colleagues should have adopted a more cautious approach to the recent half percentage point interest rate reduction, citing concerns that inflation could reignite. Bowman was the sole dissenter from the Federal Open Market Committee’s decision to decrease benchmark interest rates, the first such dissent since 2005.
Bowman articulated her concerns, noting that the 50 basis point cut could pose risks to the Federal Reserve’s dual objectives of maintaining low inflation and full employment. She warned that such a significant reduction could be misinterpreted as a premature victory on stabilizing prices, emphasizing the necessity of returning to the 2 percent inflation goal to support a robust labor market and a steady economy.
Inflation, as measured by the Fed’s preferred metric, stands at 2.5%, surpassing the central bank’s 2% target. Core inflation, which excludes food and energy, is at 2.6%. Although Bowman supported a rate reduction, she advocated for a smaller, 25 basis point cut, aligning more closely with the Federal Reserve’s traditional rate adjustment approach. The last instance of a half-point cut occurred during the early stages of the Covid pandemic in March 2020 and, before that, during the global financial crisis in 2008.
Bowman highlighted several concerns regarding the substantial reduction: it might signal that Fed officials foresee significant risks to the economy or fragility; markets could anticipate a series of large cuts; and the release of substantial sideline cash as rates fall could fuel inflation. She also expressed the view that interest rates might not need to decrease as significantly as other policymakers suggest.
She stated, “In light of these considerations, I believe that, by moving at a measured pace toward a more neutral policy stance, we will be better positioned to achieve further progress in bringing inflation down to our 2 percent target, while closely watching the evolution of labor market conditions.”
Fed officials, in recent statements, have justified the rate cut by citing easing inflation and a softening labor market. At last week’s meeting, individual policymakers projected another half percentage point reduction this year and an additional full point in 2025. Market expectations, however, are more aggressive, anticipating a 2 percentage point cut through the next year. The current target range for the Fed’s benchmark overnight borrowing rate is 4.75%-5%.
Bowman expressed her respect for the committee’s decision, emphasizing that policy is data-dependent and not predetermined. She acknowledged that while the labor market has shown some signs of softening, it remains strong. “I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment,” she stated.
