Fed's Bowman weighs the cost of another rise as Waller opens the door to half a point

Federal Reserve Vice Chair for Supervision Michelle Bowman said on Tuesday that inflation is persisting but that the benefit of another rate increase "has to be carefully weighed against its costs," according to the text of her speech at the Council on Foreign Relations in Washington.

She spoke on the afternoon of November 10, hours after the October consumer price report and the same day Governor Christopher Waller said a half-point increase should be considered in December if core prices kept rising around 0.3% a month. The Fed held its target range at 3.75%-4.00% on October 28, as FinanceInTime reported.

A governor with a plan and a vice chair with a scale

Waller set out a conditional plan in a speech in London on Tuesday morning. He said he leaned toward a 25 basis point increase at the December meeting even if October inflation improved, and that "a 50 basis point hike in the policy rate should be considered" if core CPI came in "around 0.3 percent or even higher," according to the text of his remarks. FinanceInTime covered that speech on Tuesday.

The Bureau of Labor Statistics then reported that the index excluding food and energy "rose 0.3 percent in October, as it did in September and August," according to the October CPI release.

Bowman, speaking after those figures, did not name a size or a date. She said she was "seeing signs that inflation pressures are persisting, while labor market conditions appear to be firming," adding: "This indicates that there is still work to do to bring inflation closer to 2 percent." She also said that "monetary policy is not on a preset course."

Tighter financial conditions are part of her calculation

The difference between the two speeches lies in the costs Bowman listed. She said financial conditions had tightened "because of lower equity prices, higher private interest rates, and a stronger dollar," and that corporate bond and mortgage spreads had widened.

"Against this backdrop, the benefit of additional policy tightening has to be carefully weighed against its costs for interest-rate-sensitive sectors," she said. She pointed to housing and small business investment, and said that among newer and medium-sized firms in AI-intensive sectors, "higher interest rates appear to be holding back investment and purchasing decisions."

She also described a fast build-up of borrowing tied to data centers. AI-related debt "is on track to exceed $800 billion this year," she said, and the risks "seem to be concentrated in only a few large firms that provide AI services, including AI labs and the hyperscalers."

Three shocks, each about a quarter of the overshoot

On inflation itself, Bowman said that the October CPI suggests "12-month core PCE inflation likely moved up further to 3.3 percent in October." The personal consumption expenditures (PCE) index is the gauge behind the Fed's 2% goal.

She split the overshoot into parts: "Tariffs, energy, and AI-related price pressures each accounted for roughly one-fourth of above-target core PCE inflation over the 12 months ending in September." She said she mostly views these as relative price shocks in specific sectors and forecast that core PCE inflation would "move closer to 2 percent next year."

Waller read the same period with more concern. He said more than 70% of the components of core PCE service prices had 12-month increases above 3% in September, and that he was "particularly concerned about the breadth of price increases."

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, called the October inflation report "borderline disturbing" in an interview with PBS NewsHour on Tuesday, CNBC reported.

Two reports before December 8-9

Bowman said the Fed will receive the October PCE report and the November employment report before its next meeting, which the Fed's calendar lists for December 8-9, with new economic projections.

Bowman's caution is the part of Tuesday's speeches we would weigh most

We think the vice chair's speech matters because it puts the cost of tightening on the table at the moment the case for a larger step looked strongest. Waller's condition for considering half a point was met on paper, with core CPI at 0.3% for a third month. Bowman, with the same figures, chose to stress tighter credit, wider spreads and the $800 billion of AI-related debt.

Our reading is that December now turns on whether the October PCE report confirms her 3.3% estimate and shows the pressure broadening, as Waller fears. If it does, a quarter point looks like the floor of the debate. If financial conditions keep tightening on their own, the opportunity is a smaller move that still slows inflation without straining housing further. The threat is a Fed that waits for relative-price shocks to fade while inflation expectations drift. We would change this view if the November jobs report shows the labor market loosening.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.