"Inflation expectations rising! Fed governor Bowman says "the fight" is not over yet"

Federal Reserve Governor Bauman continues to focus primarily on the anti-inflation part of the Fed's dual mandate, unlike many of her colleagues who are more focused on developments in the US labor market. It was this concern that led her to cast the only dissenting vote when the Fed decided to cut the target rate by 50 basis points on September 18. Bauman was more inclined to a smaller 25 basis point cut at the September Federal Open Market Committee meeting. Since July 2023, the Fed has maintained the federal funds rate target between 5.25% and 5.5% in an effort to curb high inflation that has persisted for decades. Bauman stated at the Kentucky Bankers Association Annual Meeting in Hot Springs, Virginia on September 26 that the fight against inflation is far from over. Bauman said, "Despite the strength of the US economy, inflation remains an issue and I am more inclined to a modest reduction in policy rates." The latest core Personal Consumption Expenditures (PCE) price index showed a 2.6% year-on-year increase in July, higher than the Fed's 2% annual target, which Bauman finds "alarming." Bauman further pointed out that there are still risks of upward inflation. Global supply chains remain susceptible to labor strikes and geopolitical tensions, which could lead to inflationary effects in food, energy, and other commodity markets. Additionally, expansionary fiscal spending and increasing demand for housing, especially due to a long-term shortage of affordable housing, could exacerbate inflation risks. Regarding the US labor market, although the post-COVID hiring boom has cooled off, hiring and wage growth have slowed, vacancies have decreased, and the unemployment rate rose to 4.2% in August, Bauman believes this is still below her estimate of full employment and does not warrant emergency assistance. She pointed out that wage growth remains strong, consumer spending is robust, and Gross Domestic Product (GDP) growth still demonstrates resilience, contrary to claims of a significantly weakened or fragile economy. Bauman, like other Fed officials, agrees that it is time to start cutting rates, but she leans towards starting the process slowly. She is concerned that a significant rate cut could signal panic about the economic outlook. Additionally, she does not want the market to expect further substantial rate cuts in the future, as this could lead to lower bond yields, loosening financial conditions beyond what policymakers anticipate, potentially reigniting inflation. At the same time, consumer expectations for future inflation have also risen. According to the latest consumer confidence survey, 12-month inflation expectations for September rose to 5.2%. Investors and analysts are also wary that the Fed may prematurely shift focus to the labor market, leading to a resurgence of inflation issues. The recent rebound in commodity prices is one of the reasons for the rebound in inflation expectations. The US benchmark West Texas Intermediate crude oil price has risen from over $65.75 per barrel in early September to above $71. However, despite the rise in inflation expectations, analysts still believe the overall trend is downwards, the question is how fast. Gennadiy Goldberg, rate strategist at Daehyun Securities, pointed out that there is no evidence to suggest another potential wave of inflation is imminent. Capital market strategist Tim Murray of T. Rowe Price said, "They (the Fed) are more willing to use any means to avoid an economic downturn, but going down this path definitely means there will be inflation." Investors may also be guarding against a replay of the 1970s when the Fed prematurely declared victory over inflation, only for it to resurface. Murray said he does not want history to repeat itself. While this scenario is unlikely, it is worth remembering.