Fed Governor Bowman turns hawkish: I see no reason to cut interest rates this year

On Friday, Federal Reserve Board Governor Bowman, who has voting rights on the FOMC, turned hawkish, stating that she believes it is not appropriate for the Fed to cut rates in 2024 and pointing out that there has been persistent inflation pressure in the US in the first few months of this year.

Regarding the economic projections submitted by Fed officials each quarter (SEP), Bowman revealed in an interview:

As of now, I have not included a rate cut in 2024 in my economic forecast. I still expect to maintain the current level of interest rates for a longer period of time, which remains my basic stance.

Bowman stated that after experiencing disappointing inflation data for several months, she needs more time to be confident that inflation will return to the 2% target, which is a prerequisite for rate cuts. "So my expectation is that there will be progress over a few months, possibly a few more meetings, before I might feel comfortable with a rate cut."

She also mentioned that there is an exception to her interest rate policy expectations, which is if there is an economic shock, it would require the Fed to address the issue through monetary policy.

Bowman urged Fed policymakers to proceed cautiously and deliberately towards the 2% inflation target. "The most important thing is for us to carefully achieve the 2% target, thereby maintaining credibility in the fight against inflation."

Bowman believes that the US economy has positive momentum and noted that consumer spending has been strong.

During her speech, Bowman also emphasized the risks in US commercial real estate, especially office buildings, as more people work remotely due to the COVID-19 pandemic. She stated that while delinquency rates generally remain at low levels, delinquency rates for some banks' commercial real estate loans have increased:

We may see declines in real estate values, reductions in rental income cash flows, or other situations that could lead to impairments in certain banks' commercial real estate loans or portfolios, especially if these loans come due and are refinanced at higher rates.

In its semi-annual report released on the same day, the Fed warned of rising delinquency rates in commercial real estate loans. The Fed stated that as delinquency rates for office-related loans continue to rise, banks are preparing for further losses. Some delinquency rates for commercial real estate loans have soared above pre-COVID-19 levels. The focus of Fed officials is on discretion in improving the speed, strength, and flexibility of regulation.

Bowman also mentioned some signs, such as low liquidity in the US Treasury market. She said that ultimately, liquidity in the US Treasury market could either amplify or mitigate the impact on the financial system.

This week, several senior Fed officials have stated that it will take longer to maintain high rates, and on Friday alone, multiple officials made intensive speeches:

• Dallas Fed President Kaplan stated that considering the disappointing inflation data so far this year, it is premature to consider rate cuts now, and there is uncertainty about the restrictiveness of Fed policy. "I need to see some uncertainties on the road resolved, we need to maintain very flexible policies, and continue to monitor how financial conditions evolve." Kaplan also mentioned that he hopes all banks will acquire and test the application of the discount window tool
• Atlanta Fed President Bostic stated on Friday that the Federal Reserve is still expected to cut interest rates this year, with a projected cut of 0.25 percentage points. Bostic, among senior Fed officials, has been one of the earliest to pour cold water on multiple rate cuts this year.
• Richmond Fed President Barkin stated that the current economic situation in the United States requires the FOMC of the Federal Reserve to carefully consider its monetary policy actions and to remain patient. With appropriate monetary policy over time, U.S. inflation is expected to fall to 2%. It is hoped that progress in inflation will be both sustained and broad-based. The demand in the U.S. economy is robust but not overheated.
• Minneapolis Fed President Kashkari mentioned that he is in a wait-and-see mode to assess whether the progress made in cooling U.S. inflation is stalling. He noted that the U.S. economy could slow down growth or embrace immigration, allowing workers to participate in the job market for longer periods with advancements in science and technology.
• Chicago Fed President Goolsbee stated that FOMC monetary policy is relatively restrictive. If a rebound in inflation signals overheating, every effort must be made to push inflation down to 2%. The housing market remains a significant inflation challenge. We have experienced fluctuating inflation, and while we are currently in a wait-and-see mode, there is not much evidence to suggest that U.S. inflation is stuck at 3%. For the Federal Reserve's FOMC, what matters is long-term inflation expectations rather than short-term inflation expectations