Just before Joe Biden leaves the White House and Donald Trump returns, two prominent Republican members of the Federal Reserve Board are weighing in on how fast interest rates should come down.
The two — Michelle Bowman and Christopher Waller — say rates can come down in a measured way. That is, so long as there’s more progress in getting inflation down to the Fed’s goal of 2% a year.
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Based on the minutes of the Fed’s Dec. 17-18 meeting, released on Jan. 8, both are firmly in the camp of not hurrying.
The two offered their views in speeches this week. Bowman spoke Jan. 9 at a California Bankers Association meeting in Laguna Beach, Calif. Waller’s remarks came Jan. 8 in Paris at a meeting of the Organization for Economic Cooperation and Development.
Both voted for the Fed’s December decision to trim its key short-term Federal Funds Rate to a range of 4.25% to 4.5%. In summer 2023, the rate was 5.25% to 5.5%.
But as the Fed was cutting the Federal Funds Rates, long-term-bond yields have gone up.
Bowman notably dissented on the Fed’s September rate-cut decision (to 4.75% to 5%), its first rate cut since 2000.
That dissent was the first in any Fed rate decision in 20 years. Bowman worried that the September rate cut was too big and risked reigniting inflation.
Waller had been comfortable about cutting rates in September (and the two since) because he says some inflation measures don’t measure actual prices but impute prices and thus overstate the inflation reality.
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Two ways of looking at rate cuts
That said, both Fed governors believe rates can come down if the data support the idea.
Waller may be more confident more cuts are ahead, perhaps because his perspective comes from years working in the Federal Reserve system. He was executive vice president of the Federal Reserve Bank of St. Louis and helped turn the bank’s data repository — Federal Reserve Economic Data or FRED — into an internationally known economic resource.
Bowman is a bit more cautious. She spent several years working at a small Kansas bank her family has owned for more than 140 years. Then, she was tapped to be Kansas Banking Commissioner.
She is laser-focused on inflation stickiness. Inflation has come down to 2.6% to 3% from highs seen in 2022. But for Bowman, 2% is the goal.
And she told the California group, “Given the lack of continued progress on lowering inflation and the ongoing strength in economic activity and in the labor market, I could have supported taking no action at the December meeting.”
Federal Reserve Governors Christopher Waller (left) and Michelle Bowman (second from left) at group photo session in 2022. With them are Fed Chairman Jerome Powell, former Governor Lael Brainard, Vice Chairman Philip Jefferson and Fed Governor Lisa Cook.
Plus, she is worried about the near-term future, especially about geopolitical stresses and supply-chain disruptions. (A longshoremen’s strike that could have crippled ports on the East and Gulf Coasts was averted on Jan. 8 with a new six-year contract.)
Bowman’s and Waller’s view can be seen in the minutes of the Fed’s December meeting, especially on when the 2% goal is achieved.
“Several (of the meeting participants) observed that the disinflationary process may have stalled temporarily or noted the risk that it could,” the minutes said. “A couple of participants judged that positive sentiment in financial markets and momentum in economic activity could continue to put upward pressure on inflation.”
The conclusion: “The process (of getting inflation to 2%) could take longer than previously anticipated.”
She and Waller were nominated as Fed governors by Donald Trump. Bowman is touted as a successor to Michael Barr as vice chair for supervision. She believes in flexible regulation that matches the need. Small banks’ rules don’t apply to large banks like Citigroup (C) , Wells Fargo (WFC) , and Bank of America (BAC) , she says.
The banking industry was thrilled that Barr will step aside on Feb. 28. He will remain a governor, however. Trump gets to nominate Barr’s successor, who must be a Republican.
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Markets are still looking uneasy
What, you ask, are they talking about? Here are three indicators that feed into the question:
The 10-year bond yield was at 4.71% on Jan. 8, up from 4.69% on Jan. 7 and 3.62% in September before the Fed’s first rate cut. Rates on 30-year mortgages on Jan. 8 were right around 7%. There’s hope in real estate circles that sooner or later buyers will just accept rates much higher than 2021 and 2022 and start buying.Gasoline prices have been rising since late December and are up 0.9% so far in January.
The minutes were released in the mid-afternoon Jan. 8, a day when stocks moved modestly higher at best. The Standard & Poor’s 500 Index was up 0.2% to 5,918 on the day. The Dow Jones Industrial Average added 107 points to 42,635.
The Nasdaq Composite slipped slightly to 19,479. The three averages have barely moved since Dec. 31, evidence that the post-election rally is losing its froth.
U.S. stock markets were closed Jan. 9 for former President Jimmy Carter’s state funeral in Washington.
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