REYKJAVÍK — Federal Reserve Governor Michelle Bowman warned against raising interest rates to combat inflation driven by energy prices during a speech in Reykjavík, Iceland. She emphasized that such policy responses could unnecessarily harm economic growth and labor market conditions.

Bowman said adjusting monetary policy to offset energy-driven inflation surges has proven ineffective. "Reacting to temporarily elevated energy price inflation would add unwarranted policy restraint, weighing unnecessarily on economic activity and labor market conditions," she said at a conference in Reykjavík. She added that research shows that when reacting to temporary energy shocks, "policy should not be overly aggressive."

Inflation remains above the Federal Reserve's 2% target, though alternative measures suggest underlying price pressures are moderating. The Commerce Department reported that the personal consumption expenditures price index rose 3.8% in April, while the same gauge excluding food and energy prices increased 3.3%. Measures that strip out extreme components, such as the Dallas Fed's "trimmed mean" inflation index, put the 12-month rate at 2.3%.

Bowman noted that the appropriate policy response depends on how long geopolitical tensions persist, specifically referencing the conflict with Iran. "Should the fighting be prolonged and inflation pressures steepen, the more likely I will consider shifting my approach to thinking about the balance of risks," she said.

The governor also expressed support for maintaining language in the Federal Open Market Committee’s most recent post-meeting statement indicating the next rate move could be a cut. Three committee members voted against that statement due to its forward guidance on potential rate reductions. Markets are expecting the Federal Reserve to stay on hold this year and possibly start raising rates in early 2027, with virtually no chance of interest rate cuts through at least 2027.