Federal Reserve Vice Chair for Supervision Michelle Bowman said Friday that she is looking for more clarity on the Middle East conflict before determining the monetary policy path forward, noting the risks of overreaction to temporary factors.
"Economic research suggests that, in response to temporary adverse energy supply shocks, policy should not be overly aggressive at stabilizing total inflation to keep employment close to our maximum-employment goal," Bowman said at the Reykjavik Economic Conference. "Reacting to temporarily elevated energy price inflation would add unwarranted policy restraint, weighing unnecessarily on economic activity and labor market conditions."
Bowman supported maintaining language in the last post-meeting statement from the Federal Open Market Committee that left open the possibility of rate reductions. Three of her FOMC colleagues dissented in favor of removing that language.
"It is appropriate to look through temporarily elevated inflation readings largely due to higher energy prices, provided that we remain credible in our commitment to achieve our inflation goal and one-off tariff effects wane, as I expect," Bowman said.
Maintaining the current policy stance will allow for stable labor market conditions while helping to lower inflation toward the Fed's 2% goal once those temporary impacts dissipate, she said.
"But the longer the conflict persists, the more we should consider the effects on inflation in our outlook," Bowman added. "In particular, the more persistent higher oil prices are -- or if we start to see broader effects of higher energy prices on PCE inflation -- the more likely I will consider shifting my approach to thinking about the balance of risks."