Bauman believes that factors such as supply chain improvements and the increased labor supply brought by immigration, which contribute to “lowering inflation,” are unlikely to continue. In addition, geopolitical risks, fiscal stimulus, and relaxed financial conditions pose additional potential risks to inflation, and the Federal Reserve may postpone rate cuts until 2025.
Federal Reserve Governor Bauman, once again adopting a hawkish stance, warns of upward risks to inflation and reiterates that it is not yet time to lower interest rates, emphasizing the need to keep rates high for a period of time.
On Tuesday, permanent voting member and Federal Reserve Governor Bauman stated in a speech on monetary policy that there are no expectations for interest rate cuts in 2024 and the Federal Reserve may postpone rate cuts until 2025:
“We have not yet reached the point where it is appropriate to lower policy rates, and considering the risks and uncertainties in my economic outlook, I will remain cautious when considering future changes in the policy stance.”
It is worth mentioning that Bauman is one of the most hawkish spokespersons of the Federal Reserve, and this time is no exception.
The latest dot plot forecast from the Federal Reserve in June shows that although no Federal Reserve policymakers expect a rate hike, the average expectation is that there will be only one rate cut before the end of the year.
Multiple upward risks to inflation outlook
Bauman mentioned that inflation has only seen “slight improvements” so far this year. Supply chain improvements and the increased labor supply brought by immigration are unlikely to continue:
1. The economy is unlikely to benefit further from improvements in the supply side. The issues of supply chain disruptions during the pandemic have been largely resolved, and the recent months have seen limited growth in labor force participation.
2. The more open immigration policy in the United States and the scale of fiscal support since the pandemic may be the reasons for the recent divergence between the United States and other major economies. Previous immigration has increased labor supply and improved the balance of the labor market, but future immigration policies may become more restrictive.
In addition, the influx of immigrants in some regions may push up rents due to limited availability of affordably priced housing.
Overall, Bauman believes that multiple areas may exert upward pressure on prices, and inflation is expected to remain at high levels for some time.
Tightness in the labor market has led to high wage growth, while geopolitical developments, fiscal stimulus, and relaxed financial conditions pose additional potential risks to the inflation outlook.
Therefore, Bauman believes that lowering policy rates too early or too quickly may lead to a rebound in inflation, requiring further increases in policy rates in the future to bring inflation back to 2% in the long term.
