Above, Michelle Bowman.
The Fed cut interest rates by 25 basis points at the September Federal Open Market Committee (FOMC) meeting, citing concerns about a weak labor market seen through reports of increasing unemployment. This rate cut was made despite inflation rising as well, inching away from the Fed’s still-unattained goal of 2% annual inflation.
Can we expect another interest rate cut from the Federal Reserve in the near future? Federal Reserve Governor and Vice Chair for Supervision Michelle Bowman indicated that proactive action might be needed to address the labor market in a Friday, September 26 speech at the economic forum, the Forecasters Club of New York.
The topic of Bowman’s speech, noted in her opening remarks, was her outlining her approach to monetary policy decisionmaking and the challenge that the Fed currently faces.
“Because our dual mandate places equal weight on both maximum employment and price stability, when these objectives are in tension, it is important not to favor one side of the mandate over the other,” she said, saying focus must be decided based on which of the goals is further from target or at most risk of deviation.
Since 2021, that means focus has been tightening policy to keep inflation under control. Now, labor market conditions are demanding more focus, Bowman said.
“I have argued that increasing signs of weakening labor market conditions provide a basis for proactively supporting the employment side of our mandate,” said Bowman, which seems to suggest lowering interest rates so as to boost the labor market.
While listing her chief concerns and challenges facing monetary policy, Bowman pointed to a “sharp housing market correction” as one such challenge. Noting that demand factors are now weighing on the market more than supply, she pointed to “elevated mortgage rates” and income growth declining while housing prices remain high as reasons for this drag. “Given very low housing affordability, existing-home sales have remained depressed despite higher inventories of homes for sale. I am concerned that declines in house prices could accelerate, posing downside risks to housing wealth and inflation in the years ahead,” said Bowman.
“We are at serious risk of already being behind the curve in addressing deteriorating labor market conditions,” Bowman added. “Should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward.”
Bowman noted concerns that inflation is not yet at the Fed’s goal but argued that annual inflation is “within range” whereas the labor market shows more grave signs of concern.
She argued that price increases from tariffs will be a “one-time effect” and inflation is likely to trend back down once that effect has dissipated.
“(As) changes in monetary policy take time to work their way through the economy,” Bowman argued, “it is appropriate to look through temporarily elevated inflation readings and therefore remove some policy restraint to avoid weakening in the labor market, provided that long-run inflation expectations remain well anchored.”
The most recent inflation data from the September Personal Consumption Expenditure (PCE) index found inflation is still slightly increasing, but within expectations.
At the July FOMC, Bowman and fellow Fed Governor Christopher Waller dissented from the majority and voted to cut interest rates. Stephen Miran, recently appointed to the Fed by President Donald Trump, voted for a larger rate cut at the September FOMC and has called for further interest rate cuts since.
Bowman did not join Miran in that vote. At her speech, she did argue that the Fed should embrace a more forward looking approach to decision-making.
“An inflexible and dogmatic view of data dependence gives an inherently backward-looking view of the economy,” she said.
Trump has consistently called for the Fed to cut interest rates and criticized Fed Chair Jerome Powell’s, in Trump’s view, slowness to act. Following Bowman and Waller’s July dissent, it was reported that Waller was now Trump’s top pick to succeed Powell as Fed chair. Bowman, who was placed in her vice chair position by Trump, was also rumored as a potential successor for Powell.
For the full transcript of Bowman’s speech, click here.
