Fed inflation hawk Bowman: Focus could shift to jobs, growth

One of the Federal Reserve Board’s biggest inflation hawks said factors other than price growth could soon play a bigger role in monetary policy decisions.

Fed Gov. Michelle Bowman, in a Friday morning speech, said higher interest rates could soon have a more pronounced effect on the real economy than they have to this point. Such a development, she said, could warrant a change in focus for policymakers.

“Although the FOMC has been focused on lowering inflation in the past few years, as we continue to make progress on approaching our 2% target, I expect that the labor market and economic activity will become a larger factor in the FOMC’s policy discussions,” Bowman said.

The statement is consistent with views and actions from other Fed officials. Concerns about a softening labor market contributed to the Federal Open Market Committee’s decision to begin cutting interest rates late last year. 

But, while Bowman supported some of those policy reductions, she voted against the group’s half-percentage-point cut last September, saying it risked “unintentionally stoking demand.” She also called for no reductions this year, citing concerns about lingering — and potentially resurgent — inflation.

Bowman’s comment on Friday, which came during an onstage appearance at the University of Chicago Booth School of Business’s U.S. Monetary Policy Forum, indicates that even the most inflation-wary policymakers are bracing for an economic downturn.

A smattering of data releases this week painted a troubling picture for the country’s economic outlook. The Federal Reserve Bank of Atlanta’s real-time growth forecasting tool, GDPNow, projected an economic contraction of more than 2% this quarter. Also, recent weeks have seen an uptick in new unemployment insurance claims, driven in part by federal government layoffs. Meanwhile, a survey of manufacturers and service providers conducted by the Federal Reserve Bank of New York found that near-term inflation expectations are on the rise.

Still, the economic indicators the Fed tracks most closely have yet to signal a need to adjust policy. Last month’s Personal Consumption Expenditure index found little change in the rate of inflation, while the latest employment situation report from the Bureau of Labor Statistics found that employment continued to grow at a healthy rate in February.

In her remarks, Bowman discussed the findings of a paper prepared for the conference on the transmission of monetary policy. She agreed with the report’s assertion that changes to the Fed’s benchmark interest rate have a “relatively small effect” on real activity but said the cumulative impact can be “quite sizable” when paired with other market shocks. 

She also said the U.S. economy proved to be surprisingly resilient in the face of rapid monetary tightening in 2022 and 2023, defying widespread expectations of recession and job losses. Bowman attributed the overperformance to a number of factors including strong household balance sheets, fiscal stimulus, innovations to productivity and population growth. These factors, she said, might have obscured the true impact of higher rates on the economy.

“The U.S. economy has been experiencing major shocks and structural changes since the pandemic, which may have influenced or masked the transmission of monetary policy to real activity,” she said.