Interest Rate Cuts not a Sure Thing

To paraphrase the great American humorist and social critic Mark Twain, reports on an imminent interest-rate cut have been greatly exaggerated. At least that is the message from a recent speech by Federal Reserve Board member Michelle Bowman.

Speaking to the Shadow Open Market Committee at the Manhattan Institute earlier this month, Bowman was quite explicit in her perspective on the path of inflation and the future of monetary policy.

“At its current setting, our monetary policy stance is restrictive and appears to be appropriately calibrated to reduce inflationary pressures,” she said.

While acknowledging the decline in prices since 2022, Bowman said 2024 is not likely to see as much easing of inflationary pressures as last year.

“Still, my baseline outlook continues to be that inflation will decline further with the policy rate held steady at its current level,” she said.

That certainly puts a damper on expectations that the Fed is poised to cut rates anytime soon. And that is likely to give Wall Street the willies and consumers another dose of budgetary heartburn.

Bowman began her speech with a quick history lesson of the spike in inflation caused by the Covid-19 pandemic and the difficulties faced by Fed policymakers to make decisions in a changing economic environment.

“An omnipresent challenge monetary policymakers face is how to account for uncertainties surrounding the current state of the economy and the economic outlook when setting monetary policy,” she said.

Addressing the impact of the pandemic and the related supply chain issues and labor market fluctuations, Bowman admitted that pretty much everyone didn’t see the spike in prices that consumers endured in 2021 and 2022.

“With the benefit of hindsight, we now know that most forecasters, ourselves included, vastly misjudged the persistence of inflation at that time,” she said. “It seems likely that the experience of the years leading up to the pandemic, when inflation was persistently low, made it hard for many to foresee how quickly that situation could change.”

Of course, it is the job of the Federal Reserve Board to anticipate potential impacts to the economy and react to them. And while they Federal Open Market Committee deserves some slack for policy decisions in the midst of a global pandemic, the  effects of supply shocks, spikes in unemployment and an economy in freefall should have been something the “experts” at least thought about.

But it is clear the economic implications of the pandemic caught the Fed by surprise just like everybody else. Unlike the rest of us, however, Bowman appears to indicate that for monetary policy at least, the “new normal” we’ve been looking for will include higher interest rates for some time.

“We are still not yet at the point where it is appropriate to lower the policy rate and I continue to see a number of upside risks to inflation,” Bowman said in the speech. “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.”

For those not believing their ears, Bowman laid out the implications of the Fed’s go-slow approach to cutting rates.

“I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” she said.

Or more simply, new normal same as the old normal.