Federal Reserve Governor Michelle Bowman said she sees a number of risks to economic activity from financial markets, including a sharp downturn in stock prices if returns on investments in artificial intelligence fall short of expectations.
Speaking in Washington on Tuesday, Bowman flagged the risk of “a large correction in equity valuations” stemming from AI returns, along with “a sharp increase in private longer-term rates.”
“Lower equity prices could undermine the resilience in consumer spending,” she said. “And higher interest rates could further strain interest-rate-sensitive sectors of the economy, like housing and small business investment.”
Bowman also signaled she could support an interest-rate hike at the central bank’s final meeting of the year next month, amid persistently elevated inflation.
“Today I am seeing signs that inflation pressures are persisting, while labor market conditions appear to be firming,” she said. “This indicates that there is still work to do to bring inflation closer to 2%.”
Fed officials left interest rates unchanged at their Oct. 27-28 meeting after raising them by a quarter percentage point in September. That was the first rate hike since 2023 as policymakers seek to cool inflation that has been above their 2% target for more than five years.
Bowman said she backed last month’s decision to hold rates steady in order to give the central bank time to better understand how conditions would evolve and how September’s hike would influence the underlying trends in the economy. But recent inflation data have been hotter than she envisioned, she said in prepared remarks before the Council on Foreign Relations.
“While I continue to expect that several of the factors currently boosting inflation will abate next year, currently inflation has proven to be more persistent than I had anticipated,” she said.
A majority of officials in September signaled at least one more rate increase would be necessary this year, according to their median projection. While several Fed officials have reinforced this view in recent remarks and said hikes can come at a gradual pace, Governor Christopher Waller earlier Tuesday said the Fed should consider raising rates by a larger, half percentage point at its next meeting in December.
Waller’s remarks came just before the Labor Department reported that consumer prices rose by more than expected in October, with core inflation accelerating at a 0.3% pace from a month earlier, meeting the threshold Waller said would fuel the need for a larger sized rate hike.
Separately, Dallas Fed President Lorie Logan, who also spoke Tuesday, said she still sees the need for at least two quarter-point rate increases. She did not commit to a jumbo-sized hike.
“It remains clear to me, given the current outlook, that the FOMC needs to implement at least two more 25-basis-point rate increases,” Logan said in prepared remarks for a conference in Houston, referring to the rate-setting Federal Open Market Committee on which she votes this year.
In her speech, Bowman also flagged concerns about rapidly rising AI-related debt, with notable gains in corporate bonds, private credit and project finance, on track to exceed $800 billion this year.
“Given their strong credit ratings, hyperscalers and large tech firms have assumed off-balance-sheet liabilities to allow smaller and riskier companies to use them as collateral in asset-based financing for data center construction and the purchase of accelerated computing equipment,” she said. “These connections among AI firms have also been accompanied by hyperscalers and chip designers making equity investments in smaller companies that purchase their products, creating the appearance of circular financing.”
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