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When the Federal Open Market Committee (FOMC) voted two weeks ago to lower the federal funds rate by 50 basis points, there was one FOMC member, Fed Governor Michelle Bowman, who voted against it.

Dissenting votes on the FOMC are rare, particularly by Fed governors like Bowman, as the committee has historically strived for consensus on these matters. In fact, the last dissenting vote by a Fed governor on an interest rate decision was back in 2005.

Bowman was not against cutting rates; she simply favored a 25-basis point cut at the September 17 -18 FOMC, as opposed to the 50-basis point reduction that was approved by the other 11 FOMC members.

On Monday, speaking to the Georgia Bankers Association, Bowman elaborated on why she favored a smaller initial rate cut.

Why Bowman preferred a smaller rate cut

In her remarks, Bowman explained that she preferred a smaller initial rate cut while the economy remains strong, but core inflation is still a concern. While inflation as measured by personal consumption expenditures (PCE) dropped to 2.2% in August, the core inflation rate ticked up to 2.7%, from 2.6%, remaining stubbornly high.

“The persistently high core inflation largely reflects pressures on housing prices, perhaps due in part to low inventories of affordable housing. The progress in lowering inflation since April is a welcome development, but core inflation is still uncomfortably above the committee’s 2 percent goal,” Bowman said in her remarks to the association.

However, Bowman added there were some other factors that warrant a “more measured approach” toward monetary policy.

“First, I was concerned that reducing the target range for the federal funds rate by a half percentage point could be interpreted as a signal that the committee sees some fragility or greater downside risks to the economy,” Bowman said.

But with no clear signs of weakening or fragility, Bowman believes that starting the rate-cutting cycle with a quarter percentage point move would have better reinforced the strength in economic conditions.

“In my mind, a more measured approach would have avoided the risk of unintentionally signaling concerns about underlying economic conditions,” she said.

Second, Bowman was concerned that a half a percentage point reduction would lead the market to expect that the committee would lower the target range by that same pace at future meetings. That would be overly accommodative, she added, potentially working against the FOMC’s goal of 2% inflation.

Stoking pent-up demand

As a third reason, Bowman argues that bringing down rates too fast invites the risk of unleashing pent-up demand from all of the cash on the sidelines waiting to be deployed.

“A more measured approach would also avoid unnecessarily stoking demand and potentially reigniting inflationary pressures,” Bowman said.

Finally, Bowman said her estimate of the neutral rate is much higher than it was before the pandemic. The neutral rate is achieved when the economy is at full employment and inflation is stable at the target level.

“I think we are much closer to neutral than would have been the case under pre-pandemic conditions, and I did not see the peak stance of policy as restrictive to the same extent that my colleagues may have,” Bowman said. “With a higher estimate of neutral, for any given pace of rate reductions, we would arrive at our destination sooner.”

Ultimately, Bowman believes that moving at a measured pace will put the committee on a better path to achieve the Fed’s dual mandate of maximum employment and 2% inflation.

“Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5%, I see the risk that the committee’s larger policy action could be interpreted as a premature declaration of victory on our price-stability mandate,” she said.

Bowman concluded by saying that she respects and appreciates the decision of her FOMC colleagues and remains committed to working with them to achieve the committee’s goals.

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