Fed's Bowman willing to look through war-driven inflation bump

• Key insight: As concerns about inflation take center stage for other monetary policymakers, Bowman's perspective shows that some Fed officials are still willing to consider rate cuts in the near future.
• Expert quote: "It is appropriate to look through temporarily elevated inflation readings largely due to higher energy prices, provided that we remain credible in our commitment to achieve our inflation goal and one-off tariff effects wane, as I expect." ? Federal Reserve Vice Chair for Supervision Michelle Bowman.
• Forward Look: Bowman's outlook on inflation and the economy appears to be more aligned with newly installed Federal Reserve Chair Kevin Warsh, but is at odds with several other members of the Fed's monetary policy committee, who have expressed concern that inflation may necessitate higher rates.

A key Federal Reserve official is defending the central bank's current monetary policy stance, including its perceived bias toward lowering interest rates, even as other officials have expressed skepticism in recent weeks that cuts are likely in the near-term.
In a Friday morning speech at an economics conference in Iceland, Fed Vice Chair for Supervision Michelle Bowman said she is willing to look through the recent rise in inflation ? which hit a three-year high last month ? as the result of one-time pricing shocks related to higher tariffs and the war in Iran.

"It is appropriate to look through temporarily elevated inflation readings largely due to higher energy prices, provided that we remain credible in our commitment to achieve our inflation goal and one-off tariff effects wane, as I expect," Bowman said.

Specifically, Bowman said she supported language in the Federal Open Market Committee's policy statement about considering future adjustments to the federal funds rate. Three committee members voted against including that language during the April FOMC meeting and others have since publicly endorsed a more neutral stance, one that gives equal consideration to both raising and lowering interest rates.

Like other FOMC members, Bowman supports a wait-and-see approach to policy adjustments, noting that economic conditions are likely to be strained until there is a lasting truce between the U.S. and Iran. Yet, she did not share the concern voiced by others that the recent resurgence in inflation could have a lasting impact on broader expectations.

Instead, Bowman made the case that inflation has actually continued to inch toward the Fed's 2% target when factoring out not only volatile inputs like food and energy price, but also individual categories of goods and services that have had outsized gains.

"Price pressures have become increasingly concentrated in a few goods categories, reflecting tariff effects and idiosyncratic changes in software prices," Bowman said. "After removing these one-off factors, core PCE inflation would have continued to hover only a bit above 2%, reflecting no pressures from the labor market and weakness in market rents."

Instead of the standard personal consumption expenditures, or PCE, price index, Bowman favors using trimmed-mean PCE to track movements in inflation. Newly installed Fed Chair Kevin Warsh has also endorsed trimmed-mean inflation as the superior metric for the current economic moment.

Several other officials have noted that the Fed's traditional measure of inflation has been above its 2% target for five years now. Fed Gov. Christopher Waller ? who, in the past, has endorsed looking through one-time pricing shocks ? said the longer inflation remains elevated, the greater the chance that consumer and business lose confidence in the Fed's ability to stabilize prices.

"The truth that we must own is that inflation has been above 2% for a long time, and that fact raises the risk that the recent escalation of inflation that we are experiencing ends up unanchoring expectations of future inflation," Waller said. "While I am not predicting this and I don't believe it is likely, it is a risk I cannot dismiss and one that I must consider in weighing policy decisions."

Bowman made no mention of inflation expectations in her speech. Instead, she suggested that prices would likely fall once oil starts flowing freely from the Middle East again. Because of this, she argued that a price hike would cause unnecessary damage to the U.S. economy and labor market.

"Economic research suggests that, in response to temporary adverse energy supply shocks, policy should not be overly aggressive at stabilizing total inflation to keep employment close to our maximum employment goal," she said. "Reacting to temporarily elevated energy price inflation would add unwarranted policy restraint, weighing unnecessarily on economic activity and labor market conditions."

Still, Bowman said, if the war does prove to be long lasting and higher prices persistent, she would be open to revising what she sees as the balance of risks between employment and inflation.

The FOMC's next meeting is June 16 and 17 and will be the first chaired by Warsh. With four dissenting votes cast last month and a variety of views expressed about the economic outlook during the past several weeks, it could be one of the more contentious monetary policy meetings in recent memory.