Federal Reserve Governor Michelle Bowman stated on Tuesday that it is premature to lower the policy rate, and indicated her readiness to support further rate hikes if inflation worsens.

While giving a speech in London, Bowman noted that "we have seen only modest further progress on inflation" in 2024 and warned that increased immigration and continued labor market tightness could sustain high core services inflation.

Bowman highlighted that the 12-month measures of total and core Personal Consumption Expenditure (PCE) inflation have been stable or slightly declined since December, standing at 2.7 percent and 2.8 percent, respectively, in April.

The consumer price index (CPI) report for May indicated a decrease in 12-month core CPI inflation to 3.4 percent from 3.6 percent in April.

However, average core CPI inflation for the year through May is 3.8 percent, higher than the second half of last year's average, suggesting elevated inflation may persist. With tight labor markets, wage growth remains high at around 4%, surpassing the level consistent with the Fed's 2% inflation goal given trend productivity growth.

"Looking ahead, I will be closely watching the incoming data," Bowman noted, underscoring the Fed's data-dependent stance. She expects inflation to eventually return to the 2% target, contingent on maintaining the federal funds rate at its current range of 5.25-5.50% "for some time."

"We are still not yet at the point where it is appropriate to lower the policy rate," she noted, adding that she "will remain cautious in the approach to future changes in policy stance."

Bowman clarified that if data indicate inflation is moving sustainably towards the 2% goal, it will become appropriate to gradually lower the federal funds rate to avoid overly restrictive monetary policy. Conversely, she maintained a hawkish stance, stating, "I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse."

Market Reactions

Following Bowman's remarks, the U.S. Dollar Index (DXY), as tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), saw a slight increase against major pairs between 7:00 and 8:00 a.m. ET.

The euro-dollar exchange rate dropped to about 1.07, partially reversing Monday's gains. Treasury yields remained broadly flat at the short end of the curve but fell slightly in the longer-dated part. U.S. equity futures were broadly positive in premarket trading amid a tech rebound.

Contracts on the S&P 500 rose 0.3%, while those on the Nasdaq increased by over 0.8%. The tech sector, as tracked by The Energy Select Sector SPDR Fund (NYSE:XLK), and the semiconductor industry, as tracked by the VanEck Semiconductor ETF (NYSE:SMH), were up 0.7% and 1.1%,

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Image created using artificial intelligence via Midjourney and a picture from Wikimedia.