FED member Michelle Bowman said in her assessments of monetary policy that the neutral interest rate is higher than before the pandemic.
Bowman argued that the Fed’s inflation is within its target range, but that risks to the labor market outweigh the risks.
Bowman stated that he favors a gradual approach to interest rate adjustments, saying, “It is critical to protect employment by taking decisive and proactive steps now.” He noted that the impact of monetary policy on the economy will be evident over time, emphasizing the importance of the central bank’s ability to make independent decisions.
Bowman said the Fed should aim for the smallest possible balance sheet size in the long term. He argued that it would be healthier to keep reserves closer to scarcity than abundance, adding, “Allowing limited volatility in money markets allows us to better understand market functioning and risks.”
Bowman stated that he strongly supports holding only Treasury bonds on the Fed’s balance sheet, saying that shifting to shorter-term bonds would give the Fed greater flexibility. He also added that the Fed should actively consider selling its mortgage-backed securities (MBS) holdings.
Bowman stated that the impact of one-time tariffs should be ignored, while the revised wage data indicated that the Fed was at risk of “falling behind.” He emphasized the importance of a more forward-looking and proactive approach, saying, “Remaining rigidly dependent on data leads to a backward-looking perspective and condemns us to constantly reacting late to the current situation.”
Bowman also noted that slowing population growth and an aging population will be factors that will lower the neutral interest rate in the long run. He also noted that technological advances could lead to a lasting increase in productivity.
The governor said that the Federal Open Market Committee (FOMC) may need to take “faster and stronger” action as labor market dynamism weakens and signs of fragility strengthen.
*This is not investment advice.