Fed says era of spiraling interest rates may not be over

Hold the phone. Or, rather, your wallet. The era of spiraling interest rates may not be over.

In a speech this week Federal Reserve Governor Michelle Bowman raised the possibility that the Fed’s goal of capping inflation at 2% might not be reached without another tweak or two to the federal funds rate, which was pushed up 11 straight periods to a 22 year high before the central bank instituted a pause in October and November.

“My baseline economic outlook continues to expect that we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2% target in a timely way,” Bowman said in a speech in Salt Lake City. “However, monetary policy is not on a preset course, and I will continue to closely watch the incoming data as I assess the implications for the economic outlook and the appropriate path of monetary policy.”

Some disagreement on interest rates

Bowman, somewhat at odds with her colleagues at the Fed, said she is willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2%, as the battle against inflation isn’t over.

“We should keep in mind the historical lessons and risks associated with prematurely declaring victory in the fight against inflation, including the risk that inflation may settle at a level above our 2% target without further policy tightening,” Bowman said.

Investors had expected the Fed would finish with its rate raising campaign and would hold rates steady in a range of 5.25% to 5.5% when officials meet next month, amid signs inflation is cooling. The central bankers meet next on Dec. 12-13.

Analysts and Fed watchers said Bowman’s remarks probably don’t indicate an imminent change in the Fed’s policy trajectory and that rates will likely remain unchanged in the December meeting. But, coming on the heels of an upward revision to third-quarter economic growth, Bowmans’ concerns about not meeting the 2% goal are well-founded.

“She’s concerned that certain of the drivers in the drop in inflation thus far, like supply chain improvement and labor force participation, may not be able to drive inflation much lower going forward,” said Marty Green, principal at the San Antonio law firm of Polunsky Beitel Green, which specializes in residential mortgage services. “The big question that her comments raised for me is what constitutes a timely return to a 2% inflation target. The answer to that question may depend on whether economic reports tend to mostly show continued improvement or whether certain data points reverse course and present a choppier picture.”

2% inflation remains target

Green said it seems clear that Bowman believes the 2% inflation target is still the goal.

“Ms. Bowman believes it is imperative that we get to the 2% target rate for inflation sooner than some of her colleagues, even if that means more rate hikes are required.”

Bowman also that interest rates might need to stay higher over the long term than before the
pandemic.

“Given potential structural changes in the economy, such as higher demand for investment relative to saving, it is quite possible that the level of the federal funds rate consistent with low and stable inflation will be higher than before the pandemic,” she said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.