Top Federal Reserve official warns US central bank may need to raise interest rates again

A top Federal Reserve official has backed more interest rate rises if inflation sticks at its current level, saying immigration and aggressive fiscal stimulus are likely to keep US prices rising more quickly than in other rich economies.

Michelle Bowman, one of the Fed’s governors and a voter on its rate-setting Federal Open Market Committee, said she remained “willing to raise” borrowing costs again “should progress on inflation stall or even reverse”.

Bowman’s remarks came in a speech on Tuesday in London, and point to the debate within the Fed about whether the bank can begin cutting interest rates this year, or at all before November’s presidential election.

Another Fed governor, Lisa Cook, said on Tuesday in New York that she believed that inflation was likely to fall “more sharply” next year and that “at some point” it would be necessary to cut rates “to maintain a healthy balance in the economy”.

President Joe Biden has made the economy and his efforts to beat back inflation part of his re-election campaign amid voter anxiety over the high costs of fuel, food and other goods, as well as mortgage rates.

US inflation jumped to more than 7 per cent in 2022, as the economy recovered from the Covid-19 pandemic, prompting the Fed to raise rates from near zero to 5.25-5.5 per cent, their highest level in two decades. Inflation has fallen since then, but remained at 2.7 per cent in April, above the central bank’s 2 per cent target.

Bowman is among the FOMC’s most hawkish members — and even she did not think that a rate rise this year was the likeliest scenario. But four of 19 officials who attend the committee also revealed earlier this month that they expect to make no rate cuts this year.

Another seven expect just one quarter-point cut, potentially pushing a decision back to the Fed’s final meeting of the year in December.

The remaining eight members think two cuts are likely, with several members of the committee saying over the past week there were signs the US economy was weakening and price pressures dissipating.

Investors are still betting that the Fed will cut by a quarter-point in mid-September, the central bank’s final meeting before the election.

However, Bowman said there remained “upside risks” to inflation — including that looser financial conditions and the federal government’s stimulus, “could add momentum to demand, stalling any further progress or even causing inflation to accelerate”.

The independent Congressional Budget Office expects the US’s fiscal deficit to hit 7 per cent of the country’s output this year.

A surge in immigration could also push up housing costs, with construction yet to catch up with demand, Bowman argued.

But Cook said she expected housing-related inflation to ease in 2025, and for three- and six-month rates to continue to ebb this year as consumers became less tolerant of higher costs for goods.

“Several national retailers have announced plans to lower prices on certain items, and there is increasing evidence that higher-income shoppers are trading down to discount stores,” she said.

The Fed’s decision to keep interest rates higher for even longer comes as G7 counterparts such as Canada and Eurozone members — Italy, Germany and France — have begun cutting borrowing costs.

Speaking in London, Bowman said it was “possible” that the divergence in strategy between the Fed and other central banks would widen over the coming months.

“Inflation and labour market developments in the US have unfolded differently in recent quarters compared to many other advanced economies, likely reflecting a more open immigration policy and significantly larger discretionary stimulus since the pandemic,” she said.