Federal Reserve Vice Chair for Supervision Michelle Bowman said Friday that the central bank should be ready to cut interest rates further, citing “signs of fragility” in the job market.
“Absent a clear and sustained improvement in labor market conditions, we should remain ready to adjust policy to bring it closer to neutral,” Bowman said in a speech at the New England Economic Forum in Foxborough, Mass. “We should also avoid signaling that we will pause without identifying that conditions have changed.”
Bowman noted that even as inflation moves closer to the Fed’s 2% goal, she continues to see “signs of fragility” in the job market. She said the recent drop in job openings and softness in hiring, as reported by the Bureau of Labor Statistics, could translate to a larger increase in unemployment.
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Bowman warned that once companies shift from slowing hiring to cutting positions, layoffs could rise and the job market could deteriorate quickly.
She noted that private-sector job gains averaged only about 30,000 per month in the fourth quarter, well below what she says is needed to keep the unemployment rate from rising. The lion’s share of the job gains came in the healthcare and social services industries, suggesting that hiring has continued to gradually soften since early last year.
“We should continue to focus on risks to our employment mandate and preemptively stabilize and support labor market conditions,” Bowman said.
The central bank, she said, should set interest rates proactively, looking forward based on forecasts, noting that placing too much weight on even the most recent data is backward-looking, which increases the risk of falling behind the curve. Bowman’s sentiments stand in contrast to others on the Fed, including Cleveland Fed president Beth Hammack, Dallas Fed president Lorie Logan, and Kansas City Fed president Jeff Schmid, who have said they don’t see a need for further “insurance” cuts to insulate the job market.
On inflation, Bowman estimates the Fed’s preferred inflation index — the Personal Consumption Expenditures Index on a “core basis” — stood at 2.9% in December. The official reading is set to be released next week. But she said when adjusting for the presumed effects of tariffs, inflation would have hovered closer to 2% — the Fed’s inflation goal.
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Bowman expects the economy will continue to expand at a solid pace this year and the labor market will stabilize near full employment as rates become less restrictive.
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