Michelle W Bowman: Brief remarks - economy and monetary policy
Brief remarks by Ms Michelle W Bowman, Member of the Board of Governors of the
Federal Reserve System, at the Independent Community Bankers of Colorado, Golden
Jubilee, Vail, Colorado, 22 September 2023.
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Thank you for the invitation to join you today, and congratulations on 50 years of
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working together to better serve the people of Colorado. As a former community
banker, it is always great to be with community bankers and to recognize the
importance of your work to strengthen economic opportunities for your communities and
your customers. I look forward to hearing more about the issues affecting your
institutions and your customers, including the impact of the Federal Reserve's
regulation and supervision.
Before we turn to our conversation, I'd like to offer a few thoughts on the economy and
monetary policy, since the members of the Federal Open Market Committee (FOMC)
met earlier this week. As you know, at that meeting, my colleagues and I voted to
maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent, after
raising rates sharply over the past year and a half to reduce inflation. During that time,
we have seen considerable progress on lowering inflation, warranting a more gradual
pace of increases this year and supporting the decision this week to hold rates steady.
However, inflation is still too high, and I expect it will likely be appropriate for the
Committee to raise rates further and hold them at a restrictive level for some time to
return inflation to our 2 percent goal in a timely way.
Most recently, the latest inflation reading based on the consumer price index showed
that overall inflation rose, responding in part to higher oil prices. I see a continued risk
that energy prices could rise further and reverse some of the progress we have seen on
inflation in recent months.
At the same time, the economy has remained strong as the FOMC has tightened
monetary policy. Real gross domestic product has been growing at a solid pace.
Consumer spending has been robust, and the housing sector appears to be continuing
to rebound. The most recent employment report showed a labor market with solid job
gains. The average pace of job gains over the past year has slowed somewhat and the
labor force participation rate has also improved over the same time frame, a sign that
labor market supply and demand may be coming into better balance.
The banking system continues to be strong and resilient. Banks have tightened lending
standards due to higher interest rates and funding costs and in anticipation of future
regulatory requirements. Despite this tightening of bank lending standards, we have not
seen signs of a sharp contraction in credit that would significantly slow economic
activity. Though bank loan balance growth has slowed, the ongoing strong balance
sheets of households and businesses combined with the growing importance of
nonbanks as sources of credit suggest that the effects of monetary policy on bank lending
may have smaller effects on the economy than in the past.
Given the mixed data releases-strong spending data but a decline in inflation and
downward revisions to jobs created in previous months-I supported the FOMC's
decision to maintain the target range for the federal funds rate. But I continue to expect
that further rate hikes will likely be needed to return inflation to 2 percent in a timely
way. The Summary of Economic Projections released in connection with the September
FOMC meeting showed that the median participant expects inflation to stay above 2
percent at least until the end of 2025. This, along with my own expectation that
progress on inflation is likely to be slow given the current level of monetary policy
restraint, suggests that further policy tightening will be needed to bring inflation down in
a sustainable and timely manner.
It is important to reiterate that monetary policy is not on a pre-set course. My colleagues
and I will make our decisions based on the incoming data and its implications for our
economic outlook. We should remain willing to raise the federal funds rate at a future
meeting if the incoming data indicates that progress on inflation has stalled or is too
slow to bring inflation to 2 percent in a timely way. Returning inflation to our 2 percent
goal is necessary to achieve a sustainably strong labor market and an economy that
works for everyone.
Turning to bank regulation and supervision, I would also like to briefly address bank
regulatory policy. With the bank failures and accompanying banking system stress
earlier this year, it was clear that the Federal Reserve, and in some cases the other
federal banking agencies, need to address supervisory shortcomings and potentially
consider revision of some failure-related bank regulations.
In my view, any proposals considered by the Board and any others jointly proposed by
the bank regulatory agencies should be
1. Focused on remediating identified issues and shortcomings;
2. Informed by data, analysis, and genuine debate and discussion among
policymakers within each of the participating agencies; and
3. Developed through a transparent and open process that allows policymakers and
the public to understand the context, data, and analysis underlying the proposed
reforms. Of course, this process must also incorporate the opportunity to solicit
meaningful public comment.
It is absolutely imperative that stakeholders-including bankers-share their views with
policymakers on regulatory reform proposals. All of the comments, data, and analysis
enable policymakers to make informed decisions throughout the rulemaking and
proposal process. Information about the intended and unintended impacts of these
initiatives is especially informative. If the Fed and other banking agencies have not
provided sufficient context, data, and analysis to satisfy stakeholder questions or
concerns, commenters should provide that perspective as well.
As you know, there are a number of regulatory rulemakings under consideration by the
Board and the other bank regulatory agencies. Some have already been published for
comment including the proposal to implement Basel III "endgame" by significantly
expanding capital requirements and bringing the threshold for compliance down to
include all banks over $100 billion in assets from only the largest GSIB banks, and the
expansion of the long-term debt requirement from only the largest banks again to all
banks over $100 billion in assets. Still other proposals have not yet been published or
moved to the next stage of the rulemaking process, including the Community
Reinvestment Act rulemaking, the further consideration of climate guidance, and others.
The Board has also publicly indicated it may propose additional revisions in the future to
Regulation II.
I recognize that in some instances, multiple, interrelated proposals out for comment at
the same time may complicate or even frustrate the ability to provide meaningful
comment. Even so, I strongly encourage your participation to inform the rulemaking
process. This audience is uniquely positioned to provide real-world feedback about the
intended and unintended consequences of agency rulemakings. I look forward to all of
the stakeholder comments and feedback throughout the current and upcoming
regulatory rulemaking processes. I look forward to our conversation.
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The views expressed here are my own and not necessarily those of my colleagues on
the Federal Open Market Committee or the Board of Governors.