The Federal Reserve’s policy rate “may need to rise further and remain restrictive for some time” to bring inflation to the Federal Open Market Committee’s 2% target, Federal Reserve Governor Michelle Bowman said Wednesday. She pointed to strong spending and a tight labor market as factors that maintain upward pressure on inflation.
However, raising rates also poses some risk, he said. “As they have faced challenges to price stability, central banks have also faced new risks to financial stability, some of which are related to considerable movements in interest rates in an environment with high and persistent inflation,” Bowman said, according to the prepared text of a speech he gave. in Morocco. Geopolitical tensions and conflicts also pose risks to financial stability, she said, through market volatility and, indirectly, through potential effects on economic activity and inflation.
Central banks must “respond to changing conditions,” he said. For example, “it appeared that many underestimated interest rate risk, and yet it was the mismanagement of this risk that created significant disruptions in the financial system this spring.”
He discussed risks in the banking sector, commercial real estate, nonbank financial institutions, U.S. Treasury markets, and the balance of banking supervision and regulation.
“While some changes in the regulatory framework may be appropriate to promote financial stability, we must be careful to ensure that the changes do not harm the long-term viability of banks, especially medium and small banks,” he said.
He again emphasized the importance of getting inflation back to target. “It is essential that central banks facing high inflation bring inflation back to their target. Failure to do so would only lead to greater risks to financial stability through less secure and unstable economic conditions and through reduced central bank credibility.” Bowman said. saying.
