Bowman: Inflation risks to the upside, further rate cuts should be gradual, cautious

By Howard Schneider

WASHINGTON (Reuters) -Federal Reserve Governor Michelle Bowman said on Friday she still expects declining inflation to allow further interest rate cuts this year, but feels rising wages, buoyant financial markets, geopolitical risks, and upcoming administration policies could slow the process and keep price pressures elevated.

"Core inflation remains elevated, but my expectation is that it will moderate further this year. Even with this outlook, I continue to see upside risks to inflation," Bowman said in comments to a group of New England business executives.

"I would prefer that future adjustments to the policy rate be gradual. We should take time to carefully assess the progress in achieving our inflation and employment goals," said Bowman, who supported the Fed's decision this week to leave the benchmark overnight interest rate at the current range of 4.25% to 4.5%.

Bowman's comments did not account for new data on inflation and employment costs released just as her remarks were published.

In her comments she said she anticipated one key measure of inflation, the Personal Consumption Expenditures price index excluding volatile food and energy costs, increased at a 2.8% annual rate in December, unchanged from November's reading - and that is what the latest data showed.

But data over a shorter 3-month and 6-month horizon continued easing towards 2%, and Fed officials have said coming comparisons with relatively high inflation a year ago should help pull the year-over-year inflation numbers into line.

A broad measure of wage and benefit costs also showed growth slowed in the last months of 2024 to 3.8% from 3.9% in the prior quarter, possibly adding to Fed confidence that price pressures will ease this year.

But it may take time to build the confidence to cut further.

Along with watching incoming official statistics, Bowman said the Fed's decision to hold rates steady for now would give policymakers time "to get clarity on the administration’s policies and their effects on the economy. It will be very important to have a better sense of the actual policies and how they will be implemented, in addition to greater confidence about how the economy will respond."

Those policies have already included deportation of immigrants, and it is expected to expand to include new import tariffs, which President Donald Trump has said he might announce as soon as this weekend.

Bowman, appointed to the Fed by Trump during his first term, has been among the more strict at the Fed about what may be needed to control inflation, and in her remarks laid out an extensive list of factors she feels may slow progress.