Fed hawks and doves "spar" - Bowman: High inflation will persist for a period of time, Goolsbee: Need more Friday-like employment reports

In the first public statement after this Wednesday's Federal Reserve monetary policy meeting, Federal Reserve officials staged a hawk-dove "debate": Hawks acknowledged the expected trend of inflation eventually decreasing, but warned of the risks of inflation rising and the trend reversing. Doves believe that more data is needed to assess the inflation situation, and more data such as this Friday's employment report could alleviate concerns about inflation heating up.

On Friday, May 3rd, Eastern Time, Michelle Bowman, a Federal Reserve Board Governor who permanently holds voting rights at the Federal Open Market Committee (FOMC) meetings, stated that high inflation is expected to continue "for a while", but she still expects inflation to eventually cool down as interest rates remain at current high levels. At the same time, she reiterated that if progress in inflation decline stalls or the downward momentum reverses, she would be willing to raise interest rates.

In a prepared speech, Bowman commented that data shows the inflation decline at the end of last year was temporary, and there has been no further progress in inflation this year.

"While the current monetary policy stance appears to be restrictive, if future data indicates that inflation progress has stalled or reversed, I would still be willing to raise the federal funds rate at future meetings."

Bowman said:

"I expect inflation to remain high for a period of time," "My baseline outlook is still that inflation will further decline as policy rates remain stable, but I still believe that some upside inflation risks will impact my outlook."

In her speech, Bowman emphasized some factors that may prevent the inflation rate from falling to the Federal Reserve's target of 2%, some of which are related to a lack of further improvement on the supply side, such as insufficient progress in factors that help exert downward pressure on inflation, such as supply chain repairs, energy price declines, and increased immigration. Risks such as housing supply scarcity and strong wage growth still exist in the real estate and labor markets.

Bowman also mentioned the risks of spillover conflicts outside the United States and recent risks of loose financial conditions. These risks could lead to a resurgence of inflation rather than a slowdown.

Federal Reserve officials are currently closely monitoring the continued high housing inflation pressure. This time, Bowman mentioned a new potential issue that could fuel high housing inflation. Bowman said that given the current low inventory of affordable housing, the influx of new immigrants into certain areas may put pressure on local rent increases, as it may take some time for new housing supply to enter the market.

After Bowman's speech, Austan Goolsbee, the Chicago Fed President who will have voting rights at FOMC meetings next year, stated in an interview that the Federal Reserve is still trying to determine whether the recent rise in inflation signals an overheating economy. He is still waiting for more data to confirm whether inflation is likely to fall to the Federal Reserve's target of 2%, and he refused to disclose whether a rate cut is possible this year.

Goolsbee commented on the April U.S. non-farm payroll report released just last Friday before his statement, calling the data of 175,000 new non-farm employees in April "very robust". Reports like this one on Friday showing a robust economy will obviously return to traditional levels before the outbreak of the COVID-19 pandemic, which will reassure him that the U.S. economy is not overheating. The more reports like this on employment, the more reassured he will be that the economy is not overheating and inflation is not rising Goolsbee said that the progress of the decline in inflation at the end of last year was good, but at the beginning of this year, there were indeed difficulties in terms of inflation. Federal Reserve officials need to take a step back to determine if this is a sign of the economy re-accelerating. The Fed needs to ensure that the turbulence in inflation is not a signal that the U.S. economy is heading into a recession.

Goolsbee believes that the Fed's monetary policy is restrictive. If such restrictive policies persist for a long time, attention needs to be paid to the job market.

After the Fed meeting this Wednesday, Powell clearly stated at the press conference that the next interest rate action is unlikely to be a rate hike. On Friday, Goolsbee did not answer whether the possibility of a rate hike was discussed at this week's Fed meeting. When asked if a rate hike is possible, he said, "If you are a central bank official, nothing is impossible to consider."

Some economists believe that signs of economic cooling may prompt the Fed to cut interest rates, but inflation data is more important. Some point out that if job growth and wage increases continue to slow down in the coming months, a rate cut may come sooner rather than later. More data is needed now to understand whether this slowdown is temporary or a new trend