Fed’s Bowman says extended energy shock could drive shift in policy outlook
by Michael S. Derby
May 29 (Reuters) – The impact of the Middle East war on the economy, although still being measured, “could lead to persistent increases in inflation that could require tighter monetary policy,” Federal Reserve Deputy Chairman for Supervision Michelle Bowman said on Friday.
“It seems too early to assess the extent and permanence of the economic effects of the Iran conflict,” Bowman said in the text of his speech at a conference in Iceland.
He said he was “optimistic” that supply disruptions would end once the war ended and that there would be a “temporary” impact on inflation and a “minimal” impact on overall economic activity. But Bowman added: “If disruptions continue in the second half of the year, we could start to see broader impacts on inflation.”
But he warned that prolonging the war could change the outlook for monetary policy. If the energy shock driving up inflation expands into price pressures more broadly, “the more likely I will be to consider shifting my approach to thinking about the balance of risk,” he said.
The Fed is expected to leave the benchmark interest rate in the range of 3.50%-3.75% at its policy meeting on June 16-17. Central bank officials have backed away from their predictions for an eventual rate cut, as some officials began speculating about the possibility of a rate hike as a major rise in energy prices increased inflation pressure.
Inflation has been well above the Fed’s 2% target for years. In the view of many policymakers, continued overshooting has made it difficult to view the recent inflation shock as a temporary event. Financial markets expect the central bank’s next move to be a rate hike, but they don’t see that change anytime soon.
Bowman, who has supported the loosening of monetary policy in recent months, said in his speech that he supports preserving the language in the Fed’s April 29 policy statement, which suggests that the next move will be an interest rate cut.
He also said it was “appropriate to look past temporarily rising inflation readings, largely due to higher energy prices, provided we remain credible in our commitment to achieving our inflation target and provided one-off tariff impacts subside.”
“Responding to temporarily rising energy price inflation would lead to unnecessary policy restrictions and place an unnecessary burden on economic activity and labor market conditions,” Bowman added.
He said the economy was “resilient” in the face of a labor market vulnerable to shocks.
(Reporting by Michael S. Derby; Editing by Paul Simao)
