Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.
A senior US Federal Reserve official has argued for further interest rate hikes if inflation remains at its current level, saying immigration and aggressive fiscal stimulus would ensure that prices in the US are likely to rise faster than in other rich economies.
Michelle Bowman, one of the Fed governors and a voting member of the Federal Open Market Committee, which sets interest rates, said she remained “prepared to raise borrowing costs again” if “inflation stalls or even reverses.”
Bowman made the remarks in a speech in London on Tuesday, referring to the debate within the Fed over whether the bank can begin cutting interest rates later this year or even before the presidential election in November.
Another Fed governor, Lisa Cook, said in New York on Tuesday that she believes inflation is likely to fall “more sharply” next year and that “at some point” a cut in interest rates will be necessary “to maintain a healthy balance in the economy.”
President Joe Biden has made the economy and his efforts to curb inflation a theme of his re-election campaign, as voters worry about high prices for fuel, food and other goods, as well as mortgage rates.
Inflation in the U.S. rose above 7 percent in 2022 as the economy recovered from the Covid-19 pandemic, prompting the Fed to raise interest rates from near zero to 5.25 percent to 5.5 percent, the highest in two decades. Inflation has fallen since then but was still at 2.7 percent in April, above the central bank’s 2 percent target.
Bowman is one of the FOMC members most opposed to raising interest rates – and even she did not think a rate hike this year was the most likely scenario. But four of the committee’s 19 members said earlier this month that they do not expect any rate cuts this year.
Another seven expect only a quarter of a percentage point cut, which could possibly postpone a decision until the last Fed meeting of the year in December.
The remaining eight members believe two cuts are likely. Several committee members said there were signs last week that the US economy was weakening and price pressures were easing.
Investors still expect the Fed to cut interest rates by a quarter of a percentage point in mid-September, at its last meeting before the election.
However, Bowman said “upside risks” to inflation remained, including that looser financial conditions and the federal government’s stimulus “could boost demand and thus delay further progress or even lead to an acceleration in inflation.”
The independent Congressional Budget Office expects the US budget deficit to reach seven percent of the country’s economic output this year.
A surge in immigration could also drive up housing costs because construction activity has not yet kept pace with demand, Bowman argued.
However, Cook expects housing-related inflation to ease in 2025 and that interest rates on three- and six-month loans will continue to fall this year as consumers become less tolerant of higher costs for goods.
“Several national retailers have announced plans to cut prices on certain items, and there is growing evidence that higher-income shoppers are switching to discount stores,” she said.
The Fed’s decision to keep interest rates high for longer comes at a time when G7 countries such as Canada and Eurozone members Italy, Germany and France have begun to reduce their borrowing costs.
In a speech in London, Bowman said it was “possible” that the strategy differences between the Fed and other central banks would widen in the coming months.
“Inflation and labor market developments in the United States have behaved differently in recent quarters compared to many other advanced economies, likely reflecting more open immigration policies and significantly larger discretionary stimulus since the pandemic,” she said.