The economic implications of the 50-basis-point interest rate cut Sept. 18 and proposed revisions to financial regulations are major focal points for the financial sector. Multiple Federal Reserve Board members detailed their individual takes on the Fed’s approach to monetary policy with respect to inflation, employment, housing, and bank supervision.
Notably, Fed Gov. Michelle Bowman talked about her lone dissenting vote in the Fed’s decision to lower rates by a half-percent, indicating she was concerned about the Federal Open Market Committee’s (FOMC) reasons for recommending it and that she believed a quarter-percent reduction would be more appropriate.
In this roundup, you will find comments delivered by four Fed governors over a two-day span with links to their full prepared remarks:
Bowman at the Mid-Size Bank Coalition of America Board of Directors Workshop:
“First, I was concerned that reducing the target range for the federal funds rate by 1/2 percentage point could be interpreted as a signal that the committee sees some fragility or greater downside risks to the economy. In the current economic environment, with no clear signs of material weakening or fragility, in my view, beginning the rate-cutting cycle with a 1/4 percentage point move would have better reinforced the strength in economic conditions, while also confidently recognizing progress toward our goals. In my mind, a more measured approach would have avoided the risk of unintentionally signaling concerns about underlying economic conditions.
“Second, I was also concerned that reducing the policy rate by 1/2 percentage point could have led market participants to expect that the committee would lower the target range by that same pace at future meetings until the policy rate approaches a neutral level. If this expectation had materialized, we could have seen an unwarranted decline in longer-term interest rates and broader financial conditions could become overly accommodative. This outcome could work against the Committee's goal of returning inflation to our 2 percent target.
“I am pleased that Chair [Jerome] Powell directly addressed both of these concerns during the press conference following last week’s FOMC meeting.”
Access Bowman’s full prepared remarks here.
Fed Chair Jerome Powell at the 10th Annual U.S. Treasury Market Conference:
“I would say that recent economic developments, against the backdrop of the experience of the past four years, have validated the Federal Reserve’s focus on reducing inflation and set the stage for the shift in monetary policy that occurred last week. The progress in bringing down inflation thus far, coupled with the softening in the labor market that I have described, means that while our focus should remain on continuing to bring inflation to 2 percent, we should now also shift attention to the maximum-employment side of the FOMC’s dual mandate. The labor market remains resilient, but the FOMC now needs to balance its focus so we can continue making progress on disinflation while avoiding unnecessary pain and weakness in the economy as disinflation continues in the right trajectory. I strongly supported last week’s decision and, if progress on inflation continues as I expect, I will support additional cuts in the federal funds rate going forward.”
Powell’s full prepared remarks are available here.
Fed Vice Chair for Supervision Michael Barr at the 10th Annual U.S. Treasury Market Conference:
“When banks exhibit a high degree of substitutability of demand for these assets, money market functioning improves. Let me explain with an example. If a bank sees holding reserves and investing in Treasury repo as near substitutes in its liquidity portfolio, it should lend into Treasury repo markets when repo rates rise above the interest rate earned on reserves. When banks can nimbly adjust portfolios in response to price incentives, the efficiency of reserves redistribution through the system improves, and market functioning is enhanced.
“In aggregate, this activity can prevent rates from rising further, all else being equal. The point at which banks, in aggregate, have a relatively immutable demand for reserves, and are unwilling to lend them out, is evident when a small decrease in the supply of reserves results in a sharp increase in the cost to borrow them. Our monetary policy tools are well positioned to help us avoid this outcome. But, of course, greater willingness of banks to reallocate across close substitutes should help avoid the emergence of sudden pressures in money markets by reducing money market frictions.”
Barr’s full prepared remarks can be accessed here.
Fed Gov. Adriana Kugler at the Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School:
“As I think about where inflation is headed, I find it helpful to consider how it has evolved over the past several years and in particular how the major components of inflation have behaved, so I want to take a few minutes to walk through those details.
“As I have indicated, the big picture is that goods inflation surged early on in 2020 and 2021, followed by prices for services excluding housing, and then housing, with some overlap in those steps. Disinflation has followed that course in reverse. Core goods inflation rose, after almost a year of social distancing shifted spending from services and after production and delivery of goods was disrupted by the pandemic. This was a big change because over the long expansion leading to the pandemic, core goods prices actually fell, slightly but consistently. On a 12-month basis, core PCE (personal consumption expenditures) goods inflation rose above zero in December 2020, reached a peak of 7.6 percent in February 2022, and fell again below zero at the end of 2023. In July of this year, it was negative 0.5 percent. This recent disinflation offset still-rising prices for services and helped reduce overall inflation. Goods inflation has reverted to its longer-term pattern as demand has moderated and supply chain problems have abated. This is reflected by various indexes of supply chain bottlenecks that showed the supply-side disruptions that contributed early on to surging inflation have now retreated to pre-pandemic levels.”
Read Kugler’s complete remarks here.