Federal Reserve flags persistent inflation risks as Bowman stops short of backing rate hikes

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Olga Shendetskaya

28 min ago

Federal Reserve flags persistent inflation risks as Bowman stops short of backing rate hikes — Fed flags stubborn inflation

Federal Reserve officials remain focused on bringing inflation back toward their 2% target as price pressures show signs of persistence. Michelle Bowman says recent shocks tied to energy prices, AI-related demand and geopolitical tensions are still influencing the outlook, even as she expects those effects to fade next year.

Highlights

Fed Governor Bowman states core PCE inflation likely rises 3.3% in October, primarily driven by elevated energy prices and AI-related demand.
Bowman highlights persistent inflation pressures despite firmer labor market conditions, saying further work is needed to reach the Fed's 2% inflation target.
Bowman warns that tighter financial conditions from falling equity prices, higher bond yields, and a stronger dollar risk complicating further policy tightening decisions.

Bowman outlines inflation outlook

As reported by Reuters, Bowman said in remarks prepared for delivery to the Council on Foreign Relations in Washington, DC, that inflation remains the central policy concern even though she does not explicitly call for higher interest rates.

She says she is seeing signs that inflation pressures are persisting while labor market conditions appear to be firming. In her view, that means there is still work to do to bring inflation closer to the Federal Reserve's 2% goal.

Bowman says the core personal consumption expenditures price index likely rises 3.3% in October, driven by higher energy prices and AI-related demand. She adds that the lack of progress on inflation is not being driven by the labor market, which has improved but is not overheated.

She says her forecast is for core PCE inflation to move closer to 2% next year as pressures from the AI buildout and the Middle East conflict wane or unwind, provided no new inflationary pressures emerge from the labor market.

Financial conditions complicate policy path

Bowman cautions that falling stock prices, rising bond yields and a stronger dollar have tightened financial conditions, creating possible risks for an economy that has strengthened this year.

She says any benefit from additional policy tightening has to be carefully weighed against the costs for interest-rate-sensitive sectors. Bowman adds that policymakers need more time to assess the durability of AI-related demand and the evolution of geopolitical risks, both of which could be critical in the months ahead when setting the policy stance.

The latest update follows our earlier article on UBS rate-hike outlook extending Fed tightening into 2027 amid persistent inflation.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.

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