London, UK – A top Federal Reserve official has expressed support for further interest rate hikes in the US economy if inflation continues to persist at its current level. Michelle Bowman, a governor at the Fed and a key member of its rate-setting Federal Open Market Committee, emphasized the impact of factors like immigration and robust fiscal stimulus in driving up prices more rapidly in the US compared to other wealthy nations.
Bowman’s stance, articulated during a speech in London, underscores the ongoing discussions within the Fed regarding the possibility of initiating interest rate cuts this year, especially given the looming November presidential election. Another Fed governor, Lisa Cook, shared her perspective in New York, foreseeing a significant decline in inflation next year and the necessity of rate cuts to maintain economic equilibrium in the future.
The Biden administration has placed a strong emphasis on addressing inflation as part of its re-election campaign, responding to concerns from voters about escalating costs for essential goods like fuel, food, and housing prices. Following a spike in inflation to over 7% in 2022, the Fed responded by raising interest rates to their highest level in two decades, a move aimed at curbing inflation pressures post the Covid-19 pandemic recovery.
While some members of the FOMC anticipate no rate cuts this year, others remain divided on the appropriate course of action, with potential scenarios ranging from one quarter-point cut to two cuts by the end of the year. Investors are closely monitoring the situation, with expectations of a quarter-point cut by the Fed in mid-September on the eve of the presidential election.
Bowman highlighted potential inflation risks associated with loose financial conditions and the federal government’s stimulus measures, emphasizing the need for a balanced approach to sustain economic growth. The Congressional Budget Office’s projection of a 7% fiscal deficit for the US further accentuates the challenges in maintaining price stability amidst evolving market dynamics.
Diverging from the monetary policy actions of G7 counterparts like Canada and various Eurozone countries, the Fed’s determination to retain higher interest rates for an extended period reflects a unique approach tailored to the US economic landscape. Bowman’s observations in London suggest a potential widening gap in policy strategies between the Fed and other central banks in the coming months, influenced by distinct factors like immigration policies and stimulus measures adopted post-pandemic.