Bowman backs sharp hike in rates and wants to ‘fed out’ from housing market

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Federal Reserve administration Michelle Bowman said she supports an aggressive series of rate hikes to tame inflation and eventually wants the central bank to stop meddling in the US housing market.

Speaking in Massachusetts, Bowman said she expects to support another 3/4-point hike in a key short-term interest rate at the Fed’s next strategy meeting in late July.

After that, she said, it’s likely to “up by at least 50 basis points over the next few consecutive sessions.”

Bowman said the central bank should keep it that way until the real or inflation-adjusted fed funds rate is positive, not negative as it is now.

“As inflation is unacceptably high, this in no way means that the nominal policy rate is lower than short-term inflation expectations,” she said.

The Fed raised interest rates by 3/4 point earlier this month from 1.5% to 1.75% in response to the highest US inflation rate in 40 years.

Testifying before Congress this week, Fed Chair Jerome Powell said the central bank is committed to bringing inflation – now at an 8.6% annual rate – back to pre-pandemic levels of around 2 % bring to. His comments suggest the Fed would be willing to risk a recession to get the job done.

For his part, Bowman called the Fed’s aggressive new stance on interest rates “not without risk”, but like Powell he said there was an imperative to bring inflation down.

“The Fed’s credibility, earned over decades of low inflation, is a powerful policy tool that is critical to our long-term success,” Bowman said. “If that credibility is eroded, it must be earned again.”

As part of a broader effort to control inflation, Bowman supports the eventual sale of the Fed’s portfolio of mortgage-backed securities.

The Fed increased its holdings in these securities to $2.7 trillion from $1.37 trillion pre-pandemic in a successful attempt to lower long-term U.S. interest rates and stimulate the economy.

The Fed’s strategy cut mortgage rates to their lowest-ever levels, boosted home sales and prompted millions of homeowners to refinance and save a bundle.

However, this measure helped raise house prices and led to the worst outburst in US inflation in 40 years.

Bowman indicated that she would like the Fed to get out of real estate altogether. Prior to 2009, the central bank had never bought mortgage-backed securities – many home mortgages bundled into investor-grade bonds.

“My long-term goal will be to get the Fed out of the business of indirectly interfering in the housing market,” Bowman said.

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