Fed Vice President Bowman supports three rate cuts by the end of the year

Michelle Bowman , Federal Reserve Vice Chair for Supervision, continues to support three interest rate cuts by the end of the year , after publicly disagreeing with other voting members of the Federal Open Market Committee (FOMC) earlier this month over their decision to leave policy rates unchanged at their last meeting. So far this year, the FOMC has kept its target range for the benchmark interest rate between 4.25% and 4.5%.

“With economic growth slowing this year and signs of a less dynamic labor market emerging, I believe it is appropriate to begin gradually moving our moderately restrictive monetary policy toward a neutral level ,” he said in a speech to the Kansas Bankers Association in Colorado, adding that speaking at the last meeting “would have allowed us to proactively hedge against the risk of further erosion of labor market conditions and a further weakening of economic activity.”

Inflation and mandate

According to Bowman, core PCE inflation appears to be trending much closer to the 2% target than the data currently indicate . With housing services inflation on a sustained downward trajectory and other core services inflation already in line with 2% inflation, only core goods inflation remains elevated, likely due to limited tariff pass-through.

“In terms of risks to achieving our dual mandate, as I gain greater confidence that tariffs will not pose a persistent shock to inflation, I see the upside risks to price stability as diminishing,” he stressed. “With core inflation on a sustained trajectory towards 2%, weak aggregate demand and signs of fragility in the labor market, I believe we should focus on the risks to our employment mandate .”

"With the pandemic-related labor shortage still fresh in the memory, companies have chosen to maintain, rather than reduce, their workforces in response to the economic slowdown," he added. "And they appear more willing to reduce profit margins, as they are less able to fully absorb higher costs and raise prices given weak demand. If demand conditions continue to weaken, companies may have to begin laying off staff , recognizing that rehiring may not be so difficult given changing labor market conditions."

The impact of tariffs

Regarding trade policy, Bowman explained that foreign suppliers are absorbing some of the new tariffs, and importers are shifting to sources with lower tariffs. Economic stagnation should also allow for only limited one-off effects on prices this year and very few, if any, second-round effects on inflation in the medium term. "I also expect that less restrictive regulations, lower corporate taxes, and a more favorable business environment will stimulate supply and offset any tariff effects on economic activity and prices in the medium term," he emphasized.

“Since tariff-related price increases are likely a one-off effect , I believe inflation will return to 2% once these effects have dissipated,” he said in his speech. “Since changes in monetary policy take time to be felt in the economy, it is appropriate to consider temporarily elevated inflation data and then remove some policy restrictions to avoid a weakening of the labor market.”

The direction of rates

Aware of changing economic conditions, Bowman believes that gradually moving our key interest rate toward its neutral level will help maintain the labor market close to full employment and ensure steady progress toward achieving our dual mandate. "I see the risk that a delay in taking action could lead to a deterioration in labor market conditions and a further slowdown in economic growth," he said.

Before its next meeting in September, the Fed will receive a series of additional economic data and information, including another employment report and two inflation reports. "A proactive approach to moving monetary policy closer to neutral , compared to the current moderately tightening stance, would help avoid further unnecessary erosion of labor market conditions and reduce the likelihood that the Committee will need to implement a broader adjustment in monetary policy in the event of a further deterioration in the labor market," Bowman said.

“My Summary of Economic Projections includes three cuts for this year , consistent with my forecasts since last December, and the latest labor market data reinforce my view,” he concluded. “I want to reiterate, however, that monetary policy does not follow a predefined path. At each FOMC meeting, my colleagues and I will make our decisions based on our assessments of the incoming data and the implications and risks to the outlook, guided by the Fed's dual-mandate goals of maximum employment and stable prices.”