Keynote speech by Governor Michelle W. Bowman

June 28, 2024

Policy divergence was the theme of Michelle Bowman’s remarks at Policy Exchange this week. Following the pandemic, most major economies had largely comparable experiences of inflation, given similar supply shocks and interventions to support demand. But Bowman, a Governor of the Federal Reserve and former Kansas Banking Commissioner, was clear in her assessment that the macroeconomic policies of the United States and of advanced economies in Europe, particularly the UK, were likely to differ considerably in the coming months.

In the UK, one of the few bits of good news for the Government in recent months has been the inflation figures. CPI fell to the Bank of England’s target rate of 2% this month, down from a peak of 11.1% in October 2022.

There is a broader debate about how much credit the Government might claim for this trend. Nevertheless, a good deal of optimism has been generated about a potential cut in the bank rate. And though these hopes were disappointed at June’s meeting of the Monetary Policy Committee, it is likely that rates will be trimmed at the next opportunity in August.

On the other side of the Atlantic, the picture looks rather different. The annualised core CPI rate has remained stubbornly high at 3.8% in May. And in her speech on Tuesday, Bowman offered words of caution about the prospects for inflation – and on the Bank’s policy – for the forthcoming months.

Productivity growth and supply side improvements in the US far outweighed those experienced in other advanced economies, and these have had a restraining effect on inflation in the years since the pandemic. But in Bowman’s estimation, further such improvements are unlikely. And given a tight labour market, international supply chain shocks and the vast amount of fiscal stimulus that has been pumped into the American economy under the Biden administration, a cut to the Fed’s policy rate seems unlikely in the immediate term.

In Bowman’s mind, all of these trends suggest a divergence in US monetary policy from that being pursued by the ECB or the Bank of England.

But there was another more general point of divergence implicit in Bowman’s speech that is worth drawing out, principally because it will be a key driver of productivity and growth in the coming years. And that is the respective approaches of the US and European countries towards regulation and risk.

Ironically, Bowman seemed to consider this a point of potential convergence. She identified discussions about the Basel III reforms – which concern the capitalisation requirements of banks – as an instance in which the US might be drifting towards a more European, risk-averse approach to financial markets regulation. Risk appetite is a pendulum she contended, and she was clearly concerned that some of the regulatory trends in the US had swung potentially too far in the “safetyist” direction. Many American commentators and academics share Bowman’s concerns.

But the truth is that a cultural gulf remains between US and UK regulatory policy, and this is only likely to widen, should Keir Starmer be elected next week and Trump secure a second term this autumn. “Securonomics”, the philosophical framework underpinning Labour’s plans for the economy, is premised on a larger, more “active” state, which is committed to ensuring the security of individuals, households and businesses across the UK. Achieving that level of security by eliminating risk and uncertainty will require a more interventionist regulatory state. And an increased stock of regulation itself creates new, unintended risks.

A Trump presidency by contrast is likely to target deregulatory measures, and can point to quite considerable successes in stemming the proliferation of regulations in the US during the previous Republican administration. At the state level, Governors in Idaho, Floria, Virginia, Arizona and so on have shown admirable imagination and political courage in bearing down on the stock of regulation they are responsible for.

This discrepancy matters from the standpoint of growth. Starmer is likely to have very few levers to pull in order to stimulate growth in the next Parliament, given the fiscal constraints. Regulatory reform, however, as Policy Exchange has long argued, is a powerful way to reduce the burden on British businesses, increase productivity, and reduce prices for consumers. Even if Bowman is correct, and the American risk appetite is diminishing, it surely remains a more supportive environment and culture of innovation and enterprise that our own, and one which we would do well to learn from.

Good progress has been made by the previous Government on financial services regulation in both the Edinburgh and Mansion House reforms. It is vital that whoever takes up residence in Downing Street next is similarly committed to re-engineering our regulatory framework to support widespread prosperity in this country. Such efforts will be essential if we are to start bridging the productivity gap with the Americans.

James Vitali is Head of Political Economy at Policy Exchange

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