Fed's Bowman warns Fed may already be behind the curve

Federal Reserve (Fed) Board of Governors member Michelle Bowman pivoted deeper into the pro-rate-cut camp on Friday, noting that recent payroll revisions shows the Fed is even further behind the curve on interest rate cuts than previously estimated.

Despite inflation metrics riding well above the Fed's 2% target, Bowman noted that a steep slowing in US population growth, coupled with an uptick in the aging average of the populace will act as structural drags on the neutral rate, pushing the Fed even further out from neutral over time.

Bowman did caution that the Fed must be able to act without political interference.

Key highlights

I look forward to discussion of sales of mbs; passive run off won't allow return to treasury-only holdings in credible time frame.
The neutral rate is higher now than where it was before the pandemic.
Inflexible, dogmatic view of data dependence gives backward-looking view of the economy and guarantees we remain behind the curve.
The Fed should consider shifting focus from overweighting the latest data points to a proactive and forward-looking approach.
I prefer the smallest balance sheet possible with reserves closer to scarce than ample.
Active balance sheet management would give more timely indication of market stress and market-function issues.
Smaller balance sheet as a percentage of GDP gives the Fed more optionality to respond to future shocks.
The lower level of reserves might encourage banks to be more active in reserve positions and liquidity risk management.
I look forward to discussion of sales of mbs; passive run off won't allow return to treasury-only holdings in credible time frame.
I strongly support holding only Treasuries.
Balance sheet tilted toward more shorter-dated securities would offer more flexibility.
Emergency lending facilities should be limited to single-purpose use in emergencies and not made permanent.
Reforming enhanced supplementary leverage ratio would address some of the problems permanent facilities like standing repo were designed to mitigate.
I see slower population growth and an ageing population as more prominent factors in pulling down neutral rate.
Time will tell how monetary policy will work through the economy.
Labor market risks outweigh risks in the job market.
The Fed is within range on inflation.
I prefer a gradual approach to rate changes.
It would take time to shift the composition of the balance sheet.
The neutral rate is higher now than where it was before the pandemic.
I see the neutral interest rate at a median estimate of 3%.