Federal Reserve Governor Michelle Bowman on Thursday called for a more aggressive path of rate hikes than most of her fellow central bankers currently contemplate, saying she wants rates to rise until they exceed near-term inflation expectations.
“Based on current inflation readings, I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them,” Bowman said in remarks prepared for delivery to Massachusetts Bankers Association conference. “Depending on how the economy evolves, further increases in the target range for the federal funds rate may be needed after that.”
Bowman’s surprisingly hawkish remarks were released as Fed Chair Jerome Powell was fielding lawmaker questions about inflation and a possible recession for a second day on Capitol Hill, pledging an “unconditional” commitment to easing price pressures.
They come little more than a week after the Fed raised rates by 75 basis points, to a target range of 1.5%-1.75%, and published forecasts showing most policymakers expect rates to need to rise to 3.4% by the end of the year.
Calling inflation a threat to sustained job growth, Bowman said she is “committed to a policy that will bring the real federal funds rate back into positive territory,” and said it “doesn’t make sense” for the policy rate to be below near-term inflation expectations.
Bowman did not specify her benchmark for near-term inflation expectations. One gauge is University of Michigan’s one-year ahead reading, which ticked up to 5.4% in June. The New York Fed’s survey of consumer expectations showed one-year-ahead inflation expectations rose to 6.6% in May.
Inflation itself is running more than three times the Fed’s 2% target.
Fed forecasts published last week show the most hawkish Fed policymaker sees rates at nearly 4.5% at the end of next year, before falling in 2024. They do not say which policymaker expects which rate path.
Worries about a recession triggered by sharply higher interest rates are on the rise, with the latest warning signal from a survey from S&P Global on Thursday showing a composite index of manufacturing and services orders slumping for the first time since July 2020, and business confidence diving.
Traders of interest rate futures still overwhelmingly expect the Fed to deliver a 75 basis point rate hike next month, and they expect rates to rise to a 3.25%-3.5% range by year end, in line with the median Fed policymaker
In her prepared remarks, Bowman noted the Fed’s rate hikes “do not come without risk.” But, she said, “our number one responsibility is to reduce inflation.”
She also laid out her support for the Fed’s just-begun balance sheet reduction plan and, eventually, to sell its mortgage-backed securities holdings, a step that Fed policymakers have said is possible but is not at this point part of its official plan.
“My longer-term goal would be to get the Fed out of the business of indirectly intervening in the real estate market,” she said.