Federal Reserve Governor Michelle W. Bowman cautioned on Wednesday that inflation remains a significant concern and suggested that interest rates may already be closer to a “neutral” level than policymakers currently realize.

Speaking at the Forum Club of the Palm Beaches in West Palm Beach, Bowman indicated the need for caution in lowering rates further, citing risks of prematurely fueling demand and reigniting inflationary pressures.

Inflation Progress Stalling, Labor Market Still Strong

While inflation has cooled since early 2023, Bowman highlighted that progress has “stalled in recent months.”

"My view is that inflation remains a concern, and I continue to see price stability as essential for fostering a strong labor market and an economy that works for everyone in the longer term," Bowman said.

She hinted that moving rates down too aggressively could risk stoking demand unnecessarily, potentially reversing inflation gains.

Bowman also indicated that unemployment has risen compared to a year ago but remains historically low and below estimates of full employment.

She attributed October's mixed job report to special factors like hurricanes and the Boeing strike, stating that underlying payroll growth appears steady.

"Payroll employment continued to increase in October at a pace close to the average monthly gain seen in the second and third quarters," Bowman said.

Proximity To ‘Neutral Rate’ Requires Cautious

According to Bowman, the neutral policy rate—the level at which monetary policy neither stimulates nor restricts economic activity—may now be higher than pre-pandemic estimates.

"We may be closer to a neutral policy stance than we currently think. I would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the endpoint," Bowman said.

At the Federal Reserve’s September meeting, policymakers lowered the federal funds rate by 50 basis points to a range of 4.75%-5.00%.

Bowman surprisingly dissented, advocating for a smaller 25-basis-point cut due to concerns that a larger move might be perceived as a “premature declaration of victory” on inflation.

Her dissent marked the first such vote by a Fed Board member in nearly 20 years.

At the November meeting, Bowman supported the 25-basis-point rate reduction, aligning with the Committee's flexible, data-dependent approach.

“I am pleased that the November post meeting statement included a flexible, data-dependent approach, providing the Committee with optionality in deciding future policy adjustments,” she said.

Market Reactions

Bowman's comments have further dampened expectations for a December rate cut.

Market-implied odds of a 25-basis-point cut fell sharply to 55%, down from 82% just a week ago, according to the CME FedWatch Tool. Traders have recalibrated their bets after a series of more cautious signals from Fed officials over the past week.

Last Thursday, Federal Reserve Chair Jerome Powell surprised markets by stating that the robust U.S. economy gives the Fed “no need to be in a hurry” to lower rates. This marked a notable shift from his more dovish tone during the November meeting press conference.

Risk assets continued to struggle on Wednesday. The SPDR S&P 500 ETF Trust ( SPY ) dropped 0.6% by midday, deepening earlier losses, while the 10-year Treasury yield ticked up 2 basis points to 4.42%.

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Image created using Midjourney with a photo from Wikimedia.