Federal Reserve Governor Michelle Bowman said today that she didn’t support the Federal Open Market Committee’s recent decision to trim rates by 50 basis points because it may have sent the wrong message about the strength of the economy and caused the public to expect similar cuts in the future.
Bowman was the only FOMC member to vote against the committee’s decision last week to lower the target range for the federal funds rate by half a percentage point to 4.75%-5%, instead favoring a cut of 25 basis points. Speaking to the Kentucky Bankers Association, Bowman said she worried that market participants would interpret a 50 basis point cut as a signal the FOMC saw fragility or greater downside risks in the economy when that was not the case. She also worried it would set the expectation for similar cuts in the future, which could have led to an “unwarranted decline in longer-term interest rates” and broader financial conditions could become “overly accommodative,” she said.
Bowman also said there continues to be a considerable amount of pent-up demand and cash on the sidelines ready to be deployed as the path of interest rates moves down. “Bringing the policy rate down too quickly carries the risk of unleashing that pent-up demand,” she said. “A more measured approach would also avoid unnecessarily stoking demand and potentially reigniting inflationary pressures.”
“Finally, in dialing back our restrictive stance of policy, we also need to be mindful of what the endpoint is likely to be,” Bowman said. “My estimate of the neutral rate is much higher than it was before the pandemic. Therefore, I think we are much closer to neutral than would have been the case under pre-pandemic conditions, and I did not see the peak stance of policy as restrictive to the same extent that my colleagues may have.”
