MNI: Bowman Advocates Fed Take More Forward-Looking Approach

Federal Reserve Governor Miki Bowman on Friday said the Fed should place more emphasis on a proactive forward-looking approach and down-weight the latest data points, repeating that the Fed must act "decisively and proactively" to address increasingly fragile labor market conditions. 

Judging where the economy was headed was much more challenging in the past amid unusually high uncertainty and significant risks to employment and price stability goals, she said in prepared remarks. "It made sense in the past to consider and be informed by the incoming data and its implications for the outlook in assessing the appropriate path for monetary policy."

"But today we are facing different conditions," Bowman told the Cornell Club of New York. "I am concerned that the labor market could enter into a precarious phase, and there is a risk that a shock could tip it into a sudden and significant deterioration. An inflexible and dogmatic view of data dependence gives an inherently backward-looking view of the economy and would guarantee that we remain behind the curve, requiring us to catch up in the future."

"I think we should consider shifting our focus from overweighting the latest data points to a proactive forward-looking approach and making a forecast that reflects how the economy is likely to evolve going forward," she said. 

Bowman repeated "we are at serious risk of already being behind the curve in addressing deteriorating labor market conditions" and "should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward." (See: MNI INTERVIEW: Fed Right To Remain Cautious On Rate Cuts-Kohn) 

"Because policy actions take time to flow through to, or have their full effect on, the economy, labor markets, and inflation, it is important that we are making predictions about where the economy is headed and to act on those forecasts in real time."

BALANCE SHEET 

Bowman said she looks forward to the FOMC considering the potential sales of the Fed's agency MBS holdings. "Simply relying on MBS runoff will not allow returning to a Treasury-only portfolio within a credible time frame."

Additionally, the Fed governor is concerned about the standing repo facility having the unintended consequence of distorting market signals by artificially affecting repo rate dynamics. 

In its current form, the SRF has a minimum bid rate set equal to the discount window primary credit rate, which is also equal to the top of the target range for the federal funds rate. 

"My preference would be for a minimum bid rate higher than the top of the federal funds rate target range in order to emphasize that the SRF’s purpose is to serve only as a backstop," Bowman said.