Additional Rate Hikes Needed to Defeat Inflation, Fed’s Bowman Warns

Federal Reserve Governor Michelle Bowman attends an event in Washington on Oct. 4, 2019. (Eric Baradat/AFP/Getty Images)

Interest rates will likely need to be higher to eliminate inflation from the U.S. economy, says Federal Reserve Gov. Michelle Bowman.

Speaking at a business conference in Alberta, Canada, on Oct. 2, the central bank official argued that policymakers would need to pull the trigger on additional rate hikes to tackle price pressures, particularly as the recent spike in energy prices threatens the institution’s gains over the past year.

“Inflation continues to be too high, and I expect it will likely be appropriate for the Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2 percent goal in a timely way,” Ms. Bowman said.

Since March 2022, the Fed has raised the benchmark fed funds rate by 500 basis points to a target range of 5.25 percent and 5.5 percent, the highest level in 22 years. While the consumer price index has eased since hitting a peak of 9.1 percent in June 2022, the country has witnessed a reacceleration in inflation.

The annual inflation rate rose for two consecutive months and touched 3.7 percent in August. Producer prices also surged in July and August, climbing 0.7 percent month-over-month and rising to 1.6 percent year-over-year.

Economists pay close attention to the producer price index (PPI) because it typically serves as a reliable pre-indicator of inflationary pressures since it measures the cost of producing consumer goods. Last month, export prices jumped 1.3 percent, and import prices swelled 0.5 percent.

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A reversal in the positive inflation trend could be realized, she noted.

“I see a continued risk that high energy prices could reverse some of the progress we have seen on inflation in recent months.”

The voting member of the rate-setting Federal Open Market Committee asserted that the Summary of Economic Projections (SEP) supported her belief that the inflation fight would be slow, with the median forecast for inflation to stay above 2 percent until the end of 2025.

“This, along with my own expectation that progress on inflation is likely to be slow given the current level of monetary policy restraint, suggests that further policy tightening will be needed to bring inflation down in a sustainable and timely manner,” Ms. Bowman said.

SEP data also showed that the Fed is penciling in one more hike before the year’s end, lifting the policy rate to 5.6 percent. In addition, officials expect higher for longer interest rates, with FOMC members revising the size of rate cuts in 2024 and 2025 by 50 basis points to 5.1 percent and 3.9 percent, respectively.

Despite strength throughout multiple components of the economy, from consumer spending to the housing market, Ms. Bowman referenced the “frequency and scope” of data revisions, which can complicate “the task of projecting how the economy will evolve.”

What Others Are Saying

A chorus of Fed officials echoed Ms. Bowman’s sentiment.

Cleveland Fed Bank President Loretta Mester told the 50 Club on Oct. 2 that inflation remains too high, potentially becoming “embedded in people’s view of the economy and affect their behavior in ways inconsistent with price stability.

She added that the Fed might need to raise rates once more this year and leave rates higher for longer.

“But whether the fed funds rate needs to go higher than its current level and for how long policy needs to remain restrictive will depend on how the economy evolves relative to the outlook,” Ms. Mester stated. “There is considerable uncertainty around the outlook.”

In a prepared speech, New York Fed President John Williams noted that interest rates are at or near their peak, but they will unlikely come down anytime soon as the central bank still has “a ways to go to fully restore price stability.”

In order for the Fed to get inflation to home in on 2 percent in 2025, Mr. Williams thinks “we will need to maintain a restrictive stance of monetary policy for some time.”

Michael S. Barr, the Fed Vice Chair for Supervision, explained in an Oct. 2 speech that the key question for monetary policymakers is determining how long to keep interest rates high. He believes it will take some time.

“In my view, the most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals,” Mr. Barr stated.

Last month, the Fed kept the fed funds rate unchanged, but the FOMC left the door ajar for another rate increase.

A monitor displays information about the Federal Reserve interest rate on the floor at the New York Stock Exchange in New York on Sept. 20, 2023. (Seth Wenig/AP Photo)

Treasury Island

U.S. Treasury yields rallied again to kick off the first trading session of October, with the benchmark 10-year yield flirting with a 15-year high recorded last week.

The 10-year yield reached an intraday high of 4.701 percent, the highest level since Oct. 2007. It then retreated to 4.693 percent at the closing bell.

The 2-year Treasury yield also touched an intraday high of 5.121 percent before paring some of its gains to finish the Oct. 2 session at 5.11 percent.

For longer-term Treasury yields, like the 30-year, one hedge fund billionaire thinks they have more room for growth, citing higher inflation.

“The 30-year Treasury is likely to go higher,” Pershing Square’s Bill Ackman told CNBC on Oct. 2.

“I don’t know that the 10-year has to go meaningfully above 5% because you’re seeing some weakness in the economy. But on a long-term basis, we think structural inflation is going persistently higher in a world like that.”

Investors have been examining the outlook for the Federal Reserve, particularly on interest rates. The expectation in the bond market is that interest rates will likely stay higher for longer to cool off the U.S. economy and defeat inflation.

“The journey for market rates in recent weeks has been impacted by the reduction in the size of the rate cut discount as priced by the markets out to 2025,” wrote ING economists in a research note.

“In that sense there has been some separation between delivery of Fed policy up front and direction for market rates, with market rates rising while the immediate Fed policy rate call has been broadly non-committal (the market discount).”

At the same time, traders will also be assessing fresh data this week to understand the state of the economy, including the much-anticipated September jobs report that will be released on Oct. 6.

The consensus estimate suggests the labor market added 170,000 new jobs last month, and the unemployment rate dipped to 3.7 percent.