Unlock Editor’s Digest for free
FT editor Roula Khalaf picks her favorite stories in this week’s newsletter.
The Federal Reserve’s top official has backed another rate hike if inflation remains at current levels, saying immigration and aggressive fiscal stimulus are likely to keep U.S. prices rising faster than in other rich economies.
Michelle Bowman, one of the Fed’s governors and a voter on its Federal Open Market Committee for setting rates, said she remained “willing to increase” borrowing costs “if inflation stalled or even reversed.”
Bowman’s remarks came in a speech in London on Tuesday and point to a debate within the Fed over whether the bank can start cutting interest rates this year or even before the November presidential election.
Another Fed governor, Lisa Cook, said in New York on Tuesday that she believed inflation was likely to fall “sharper” next year and that “at some point” rate cuts would be necessary “to maintain a healthy balance in the economy.”
President Joe Biden has made the economy and his efforts to beat inflation a part of his re-election campaign, amid concerns among voters about high prices for fuel, food and other goods, as well as mortgage rates.
US inflation jumped to more than 7 percent in 2022 as the economy recovered from the Covid-19 pandemic, prompting the Fed to raise rates from near zero to 5.25 to 5.5 percent, the highest level in two decades. Inflation has since fallen but remained at 2.7 percent in April, above the central bank’s two percent target.
Bowman is among the most hawkish members of the FOMC — and even she didn’t think a rate hike this year was the most likely scenario. But four of the 19 officials who sit on the committee also revealed earlier this month that they don’t expect any rate cuts this year.
Another seven expect just one quarter-point cut, which could push the decision back to the Fed’s last meeting in December.
The remaining eight members think two cuts are likely, with several committee members saying there have been signs over the past week that the U.S. economy is weakening and price pressures are dissipating.
Investors are still betting the Fed will cut rates by a quarter point in mid-September, the central bank’s last meeting before the election.
But Bowman said there were still “upside risks” to inflation – including that looser financial conditions and federal government stimulus “could add a boost to demand, halt any further progress or even cause inflation to accelerate.”
The Independent Congressional Budget Office expects the US fiscal deficit to reach 7 percent of the nation’s output this year.
A surge in immigration could also drive up housing costs, with construction not yet catching up with demand, Bowman argued.
But Cook said she expects housing-related inflation to moderate in 2025 and that three- and six-month rates will continue to fall this year as consumers become less tolerant of higher commodity costs.
“Several national retailers have announced plans to cut prices on certain items, and it’s increasingly becoming apparent that higher-income shoppers are moving to discount stores,” she said.
The Fed’s decision to keep interest rates higher for longer comes as G7 peers such as Canada and eurozone members – Italy, Germany and France – have started to cut borrowing costs.
Speaking in London, Bowman said it was “possible” that differences in strategy between the Fed and other central banks will widen in the coming months.
“Inflation and labor market developments in the US have performed differently in recent quarters compared to many other advanced economies, likely reflecting more open immigration policies and significantly greater discretionary stimulus since the pandemic,” she said.