Fed's Bowman cautions rising energy prices could stall inflation progress, calls for higher rates

Fed Governor Michelle Bowman said Monday that she sees a risk that rising energy prices could reverse progress on inflation and favors raising interest rates further.

"I see a continued risk that high energy prices could reverse some of the progress we have seen on inflation in recent months," Bowman said in a speech in Banff, Canada. "I continue to expect that further rate increases will likely be needed to return inflation to 2% in a timely way."

Bowman pointed to the latest inflation reading based on the Fed’s favored measure of inflation – the Personal Consumption Expenditures (PCE) price index — which showed that overall inflation in August rose in part because of higher oil prices.

She said she thinks progress on inflation is likely to be slow given the current level of interest rates and said that suggests the Fed will need to further hike rates to bring inflation down in a sustainable and timely manner.

"I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2% in a timely way," she said.

Elsewhere, Fed Vice Chair of Supervision, Michael Barr, speaking in New York, said he thinks the most important question at this point is not whether an additional rate increase is needed this year or not. Rather, he said it is how long the Fed will need to hold rates at heightened levels to bring down inflation to 2%. He said he thought the full effects of past tightening are yet to come in the months ahead.

Barr also noted while he now expects a higher chance the job market to be more resilient than previously thought and that economic growth has surprised to the upside, he cautioned that achieving bringing down inflation without causing a lot of job losses is still hard to achieve.

The Fed’s preferred inflation gauge found that on a "core" basis, which excludes the volatile food and energy categories, the PCE index showed inflation grew 3.9% in August, down from 4.1% from the month prior.

Fed officials see raising rates one more time this year to a range of 5.5%-5.75% before holding rates at that level for an extended period. Rates currently stand in the range of 5.25%-5.5%.

The Fed has raised rates 11 times since March 2022 in the most aggressive rate-hiking campaign since the 1980s. While inflation has dropped, it remains around 4% — as Bowman pointed out, around double the Fed’s target.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

Separately, Bowman again called for a third-party review of what led to the failure of regional banks Silicon Valley Bank, Signature Bank, and First Republic this spring, noting that the reports from the Fed and Office of the Inspector General reached inconsistent conclusions.

Bowman said questions need to be asked, including whether supervisors were acting procyclically or overreacting to events earlier this year. And when agencies adopt a more adversarial approach to supervision, or apply standards that are disproportionate to risk, does that negatively impact a bank’s ability and willingness to engage in open communication with their examiners?

"Asking these questions can help us appropriately calibrate our revised approach to banking supervision and help us avoid reacting in a way that is disproportionate to an institution’s risk to the banking system," she said.

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