Federal Reserve Governor Michelle Bowman warned Friday against raising interest rates to deal with the current price surge.
With inflation well above the central bank’s 2 percent target, markets expect the Fed to stay on hold this year and possibly start raising interest rates in early 2027. Current prices suggest that there is virtually no chance of rate cuts until at least 2027.
But Bowman said adjusting policy to offset energy-related inflation surges has proven ineffective.
“A response to temporarily elevated energy price inflation would lead to unwarranted policy restraint and place unnecessary strain on economic activity and labor market conditions,” the policymaker said at a conference in Reykjavík, Iceland.
Bowman added that research shows that when responding to temporary energy shocks, “policy should not be overly aggressive.”
The comments come a day after the Commerce Department reported that the personal consumption expenditures price index – the Fed’s benchmark inflation indicator – rose 3.8% in April and 3.3% excluding food and energy prices.
However, measurements that filter out extremes in components within the gauges show that inflation is getting closer to target. The Dallas Fed’s “trimmed mean” inflation index puts the 12-month rate at 2.3%.
Echoing comments from her fellow central bankers, Bowman noted that the policy response depends on the duration of the conflict with Iran. If the struggles continue and inflationary pressures increase, “I’m more likely to think about changing my approach and thinking about balancing the risks.”
Bowman added that she supported retaining language in the central bank’s recent post-meeting statement, which suggested the next rate hike could be a cut. Three members of the Federal Open Market Committee voted against the statement, citing the inclusion of so-called forward guidance language.
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