Hawkish Statements from a Fed Governor

Fed Official, Governor Michelle W. Bowman, gave a speech at Executive Officers Conference, Massachusetts Bankers Association, Harwich, Massachusetts on June 23. 

Key Points

• Inflation is the highest we have seen in the United States in 40 years and so far it shows little sign of moderating. At the same time, the economy is growing at a moderate pace, and the labor market is extremely tight.
• That tightness is contributing to inflation, because labor is the largest input cost for producing goods and providing services.
• Today, most people who want to work can find a job, and wages and salaries have risen faster than they have in decades. Even with these gains, wages have not kept pace with inflation, which has made it much more difficult for many workers to make ends meet in the face of soaring housing, energy, and food costs.
• The tightness of the labor market is exacerbated by a labor force participation rate that remains far below the pre-pandemic benchmark, representing millions of workers sitting on the sidelines.
• I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them.
• The case for further rate hikes is made stronger by the current level of the "real" federal funds rate, which is the difference between the nominal rate and near-term inflation expectations.
• Since inflation is unacceptably high, it doesn't make sense to have the nominal federal funds rate below near-term inflation expectations. I am therefore committed to a policy that will bring the real federal funds rate back into positive territory.

Views

• The labor market is really tight. How tight? the 2 jobs are waiting for 1 worker kind of tight.
• The force participation rate is lower than the pre-[andemic level? Why don't people jusg get back to work?
• If inflactoin does not come down and the labor force keeps tight, Governor Bowman supports a 75 basis points hike and 50 basis points hikes in subsequent meetings. So a 75 basis points plus another 50 basis points is 125 basis points. Then the Fed funds rate would reach 2.75%-3%. The current 10 year treasury yield is 3.138%, which is close to the possible future Fed funds rate and bond prices have a lot to drop.
• The 10 year treasury rate remain relatively low with respect to the possible 3% Fed funds rates may be the resuts of 2 reasons. One, investors are betting not so many rate hikes described by Governor Bowman. Two, investors are fearful of recession so then people rather lock in with a 3.138 10 year yield even if the bond price would drop.

Immidiate to watch

• Oil Price Stabilization for signs of stablized inflation.
• Food Price Stabilization for signs of stablized inflation.
• Job creation and unemployment rate chane for signs of recession.

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Source: The Outlook for Inflation and Monetary Policy. Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/newsevents/speech/bowman20220623a.htm. 2022/6/25