Fed governor explains why she became first to dissent from rate cut decision in nearly two decades

Federal Reserve Governor Michelle Bowman warned about inflationary risks Tuesday, explaining her disagreement with the Fed’s decision to conduct a bigger-than-normal interest rate cut.

Bowman, who assumed office in 2018, became the first Fed governor since 2005 to dissent from an interest rate deci sion last week. Following a two-day meeting of the Federal Open Market Committee, the Fed opted to cut its interest rate target by half of a percentage point rather than conducting a typical quarter-point revision.

The Fed has a dual mandate: price stability, or preventing too-high inflation, and maximum employment, or keeping unemployment low. Bowman told the Kentucky Bankers Association on Tuesday that she still sees inflation as a bigger concern than a slowing labor market.

“Turning to the risks to achieving our dual mandate, I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment,” Bowman said.

The labor market has been softening, but Bowman said still-elevated wage growth, solid consumer spending, and gross domestic product growth “are not consistent with a material economic weakening or fragility.”

The economy added 142,000 jobs in August. The unemployment rate is now 4.2%, an uptick from recent lows of 3.4%. In another sign of cooling, job openings plunged in July to their lowest level since January 2021.

Ahead of the cut, which was the first downward revision since the emergency interest rate cuts in 2020 at the outset of the pandemic, investors were unsure what tack Fed officials would take. Many investors were betting that the Fed would implement a smaller rate cut, which is an unusual disconnect given that central bank decisions are usually telegraphed long in advance.

The bigger half-percentage-point cut could indicate that Fed officials are increasingly concerned that the labor market is slowing, especially given recent declines in inflation.

The consumer price index is the most often-cited inflation gauge for the public. CPI inflation fell four-tenths of a percentage point to 2.5% for the year in August, marking five months of disinflation and moving closer to the Fed’s goal of 2%.

But in explaining the rare dissent, Bowman said she was concerned that the bigger interest rate cut “could be interpreted as a premature declaration of victory on our price-stability mandate.” She said she thinks the Fed should move at a “measured pace.”

While inflation has been meaningfully falling, she noted risks that cutting too quickly could drive up demand and work against the central bank's multiyear efforts to tame inflation.

“Bringing the policy rate down too quickly carries the risk of unleashing that pent-up demand,” Bowman said. “A more measured approach would also avoid unnecessarily stoking demand and potentially reigniting inflationary pressures.”

Last week, Fed Chairman Jerome Powell told reporters after the decision that the move shows confidence that officials can thread the needle and keep inflation coming down to the Fed’s preferred level while also safeguarding the strength of the jobs market.

“This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%,” Powell said.

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At the meeting, the Fed also released new economic projections, which show where FOMC participants think key metrics such as inflation, GDP, and unemployment will be in the coming months and years.

Fed officials now see inflation, as measured by the Fed’s preferred gauge, the personal consumption expenditures index, falling to 2.3% by the end of 2024. That is lower than the Fed’s previous projection of 2.6%. They expect inflation to fall to 2.1% by the end of next year and settle at 2% in the longer term.