Federal Reserve governor Michelle Bowman said in a speech Friday that she still thinks the impact of the Iran war on inflation will be temporary.
But if the conflict stretches on, price pressures could become broader and longer-lasting.
Speaking at a conference in Iceland, Bowman said that, for now, the Fed’s benchmark interest rate is “moderately restrictive,” and that’s working.
“But the longer the conflict persists, the more we should consider the effects on inflation in our outlook,” she said. “In particular, the more persistent higher oil prices are — or if we start to see broader effects of higher energy prices on PCE inflation — the more likely I will consider shifting my approach to thinking about the balance of risks.”
Bowman noted that when looking at the Fed’s preferred measure of inflation — the Personal Consumption Expenditures (PCE) index — progress in bringing down inflation appears to have stalled.
PCE inflation rose 3.8% in April as the conflict in the Middle East pushed oil prices higher. That was up from 3.5% in March. Excluding volatile food and energy prices, on a “core” basis, PCE rose 3.3%, up a tenth from 3.2% in March. That marked the highest core reading in 2.5 years.
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Federal Reserve governor Michelle Bowman said in a speech in Iceland on May 29 that, for now, the Fed’s benchmark interest rate is “moderately restrictive,” and that’s working. (Bill Clark/CQ-Roll Call, Inc via Getty Images) · Bill Clark via Getty Images
But Bowman also said that looking at other measures of inflation, like the trimmed mean PCE measure, which excludes outlier prices, core inflation has moved closer to 2%. Bowman said price pressures have become increasingly concentrated in a few goods categories, reflecting tariff effects and idiosyncratic changes in software prices.
Bowman said she is still somewhat concerned about the labor market, noting that it appears to have stabilized in recent months but still shows signs of fragility.
She pointed to measures beyond payrolls and the 4.3% unemployment rate, which she said show weakness. Notably, she mentioned that the job-finding rate, which measures the percentage of unemployed workers who are able to find a job, has continued on a downward path in recent months. Also, employment growth has been concentrated in healthcare and social assistance — sectors less tied to the highs and lows of economic cycles.
Bowman said she favored retaining language in the policy statement from the last meeting that signals that the Fed’s next rate move would be down. That stands in contrast to several others on the committee who objected and wanted to signal that the Fed’s next move could be a cut or a hike, depending on the conflict in Iran and inflation.
Bowman said she wants more clarity on the economic impacts from the conflict in the Middle East and the durability of those effects.