Bowman turns to inflation, wants AI and Middle East risks to subside

Overall, the remarks have a hawkish tone.

By shifting focus to inflation and linking it to Middle East risk, Bowman keeps energy prices central to the Fed debate, bolstering the US dollar and short-term Treasury yields.

Her focus on pace and timeline points to a preference for gradual tightening over bold moves, potentially limiting expectations of larger or faster rate increases.

For gold, a stronger case for further tightening has become a headwind during the conflict, rather than a benefit.

Oil traders might view her comments as a warning that additional Middle East escalation directly impacts Fed policy risk.

---

Earlier:

• Fed's Bowman: Persistent inflation, firming labor conditions suggest 'work to do'

---

Bowman has clearly shifted to combating inflation, but her remarks on pace and timeline indicate she prefers a gradual approach rather than a hasty one.

Summary:

• According to Bowman, she is turning her attention to inflation, and the absence of a downward trend in price pressures should cause the Fed to pause.
• She would require AI and Middle East risks to subside before she can be certain that inflation will decline next year.
• She stated that longer-term inflation expectations remain very well anchored, but that does not necessarily guide her decisions.
• She suggested the Fed must consider the pace and timeline of its response, referencing last year's pattern of gradual cuts, a pause, and then resumption.
• She does not foresee AI eliminating jobs overall in the US economy; instead, she expects productivity gains and new roles to emerge.
• On supervision, she anticipates finalizing the GSIB surcharge and Basel III rules within weeks, with her attention shifting to regulations for smaller banks.

Michelle Bowman, the Federal Reserve Vice Chair for Supervision, stated that she is redirecting her focus toward inflation, contending that the lack of a downward trajectory in price pressures warrants hesitation from policymakers. She further noted that she requires AI and Middle East risks to diminish before she can be confident that inflation will decline in the coming year.

These comments came during a Q&A session on Tuesday, following her earlier statements that persistent inflation and strengthening labour market conditions indicate the Fed still has tasks ahead. In those earlier remarks, she estimated October's core PCE inflation at 3.3%, fueled by energy prices and AI-related demand.

Her most recent statements had a more nuanced tone. On one hand, Bowman noted that long-term inflation expectations are still firmly anchored. She described expectations as a significant data point but indicated they do not necessarily influence her thought process, implying that anchored expectations alone will not determine her policy stance.

On the other hand, she stated that the Fed must consider the pace and timeline for tackling inflation. She compared this to the central bank's strategy last year, which involved gradual rate cuts, a pause, and a subsequent resumption. She believes a similarly measured, incremental approach could be applied to inflation in the months ahead. This perspective indicates a preference for gradual tightening as opposed to a swift move, without suggesting any particular decision.

Regarding the labour market, Bowman said she does not anticipate AI eliminating jobs from the US economy. She expects the technology to enhance worker productivity, generate new positions, and eliminate less essential ones.

Bowman also addressed her supervisory responsibilities. She expressed hope and expectation to finalize rules for the surcharge on global systemically important banks (GSIBs) and Basel III capital standards within weeks, noting that her focus has shifted to regulations and supervision for smaller banks. She mentioned that the Fed conducts continuous cybersecurity inspections of banks and has observed a strong emphasis on identifying and fixing vulnerabilities. Additionally, she stated that maintaining open communication channels with the Treasury is critically important.

Overall, these remarks keep inflation at the core of Bowman's concerns, while her focus on pace indicates she supports a gradual approach. Future inflation data and any reduction in energy and AI-related price pressures will be crucial in determining how this view evolves.