Why two Fed officials doubt the need for many more rate cuts
Greg Robb

Benchmark rate is already close to the goal of ‘neutral,’ Bowman and Schmid say

Two top Federal Reserve officials on Thursday questioned the need for many more interest rate cuts.

Fed Governor Michelle Bowman and Kansas City Fed President Jeff Schmid both said the 100 basis points in rate cuts since September has brought the Fed’s benchmark rate down to “neutral,” where it neither dampens or boosts demand.

That neutral level has been the goal of rate cuts. Fed officials would only go below neutral if the economy were slowing markedly.

“My read is that interest rates might be very close to their longer-run level now,” Schmid said in a speech to the Economic Club of Kansas City. He said he is in favor of adjusting policy gradually going forward “and only in response to a sustained change in the tone of the data.”

“The strength of the economy allows us to be patient,” Schmid added.

Many Fed officials, including Fed Chairman Jerome Powell and Fed Gov. Christopher Waller, said that rates remain high enough to slow the economy.

“I do think they are restrictive, but not enough to throw us into recession,” Waller said Wednesday.

In a separate speech, Bowman said she continues to be concerned that the current stance of policy “may not be as restrictive as others may see it.”

She noted how strong the economy is growing and that the stock market is more than 20% higher than a year ago.

“While it is not my baseline outlook, I cannot rule out the risks that progress on inflation could continue to stall,” she said.

Schmid will be a voting member of the Fed’s interest-rate committee for the first time this year. Bowman, as a governor, always has a vote.

Ellen Zentner, chief economist strategist for Morgan Stanley Wealth Management, said the split between Fed officials will be apparent this year.

“I think you are going to see the divide even greater on the Fed after we get the rotation” in voters this year, Zentner told MarketWatch.

Some clarity on the incoming Trump administration’s policies might help officials come together.

Bowman said the Fed shouldn’t “prejudge” Trump’s economic plans.

“We should wait for more clarity and then seek to understand the effects on economic activity, the labor market and inflation,” she said.

Bowman is considered a likely choice to become the next Fed vice chair for supervision, replacing Michael Barr, who said he would step down from the post but remain a Fed governor.

In her speech, Bowman said Fed bank regulators should increase their transparency.

“A deliberate, transparent, and fact-based approach to pursuing statutory objectives helps us ‘show our work,’ that we are focused on pursuing our policy goals, and are avoiding straying into political concerns outside of statutory purposes or functions,” she said.

Banks and regulators need to be an adversarial system, but can share the goal of a safe and sound banking system, she added.

 

 

Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.

 

 

 

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