Federal Reserve | Up and Down Wall Street
Inflation Isn’t Tamed Yet. The Loneliest Fed Governor Was Right.Michelle Bowman cast the only dissenting vote in the Federal Open Market Committee’s Sept. 18 decision to slash its federal-funds target by half a percentage point.
By
Randall W. Forsyth
Oct. 4, 2024 6:39 pm ET
Federal Reserve governor Michelle Bowman.
ERIC BARADAT/AFP via Getty Images
Back in high school, the physics teacher asked which is denser, heavy cream or milk? Some 30-odd hands went up in favor of cream. I was certain it was milk, but suddenly I was unsure when I was the only one to answer that. It’s a lonely feeling to go against the crowd.
I don’t know if that’s how Michelle Bowman felt when she cast the only dissenting vote in the Federal Open Market Committee’s Sept. 18 decision to slash its federal-funds target by half a percentage point, to a range of 4.75% to 5%, instead of the more usual change of a quarter-point. It was the first time a Federal Reserve governor dissented from a FOMC move since 2005. In a statement two days later, Bowman explained her dissent, citing the strength of the U.S. economy and the continuing concern about inflation, which remains above the Fed’s 2% goal.
Since then, Bowman’s independence has been vindicated. Not only has past data been revised to show significantly more robust growth than previously estimated, but the latest jobs numbers, released on Friday, blew past economists’ projections. And instead of falling on the Fed’s supersize cut, Treasury yields are markedly higher since its move, which suggests the market sees the future course of rates differently than the solons at the central bank, with one notable exception.
“The market was always ahead of itself in pricing [a fed-funds target of] 3% by spring 2025,” wrote Steven Blitz, T.S. Lombard’s chief U.S. economist, in a client note on Friday. “Today’s data underscore the point.”
He was referring to the 254,000 jump in nonfarm payrolls in September, more than 100,000 above the consensus guess among economists, and not including upward revisions totaling 72,000 in the two prior months’ tally. The unemployment rate, which is derived from a separate survey of households, dipped to 4.1% in the latest month from 4.2% (although before rounding to a single decimal, the headline jobless rate fell to 4.05% from 4.22%).
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While the uptrend in the headline jobless rate over the past 16 months reflects a cooling in the labor market, Morgan Stanley economists note that largely reflects an increase in the labor force. Indeed, the latest Job Openings and Labor Turnover Survey, released earlier this past week, showed 8.04 million job vacancies in August, up from an upwardly revised 7.71 million in July.
That also followed significant upward revisions that showed the economy was significantly stronger than earlier numbers implied. Gross domestic income, which is supposed to equal more widely followed gross domestic product, was revised up for the second quarter to show 3.4% annual real growth in the second quarter, massively higher than the 1.3% previous estimate. The reason: Personal income was much higher, which meant the saving rate was 5.2%, rather than the paltry 3.3% previously reported. In other words, Americans weren’t tapped out.
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The latest numbers point to only quarter-point cuts by the Fed in November and December, to 4.25%, “and that should be it,” Blitz asserted. “There is an inherent inflation problem, given the room for private sector employment to recover and slow growth in the labor force.” Indicative of the current labor market conditions, the International Longshoremen’s Association suspended its three-day strike on Friday after East Coast and Gulf Coast ports sweetened their wage offer to a 62% hike over six years from 50%.
While Fed Chair Jerome Powell previously said the monetary authorities didn’t want any further cooling in the labor market, the latest numbers suggest that any such worries were a bit overwrought. Inflation will be the focus this coming week, with the September consumer price index seen by economists rising 0.2%, excluding food and energy, a tick lower than August’s rise.
Given the strengthening of income data from GDI, Capital Economics Chief North America Economist Paul Ashworth sees risks to core inflation reversing to the upside. Maybe Bowman will begin to be less lonely.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
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