Fed's Bowman says jobs data solidifies case for rate cuts

The Federal Reserve's top regulator believes the central bank should shift its focus to protecting the job market, stressing that cutting interest rates in the near term should be considered to support employment and consumer spending.

In a speech Saturday, Fed Vice Chair for Supervision Michelle Bowman said concerns around inflation, specifically how tariffs might impact price stability, will have minimal impact on the economy, but that there are emerging "signs of fragility in the labor market" that requires the Fed's attention.

Bowman said she foresees three interest rate cuts for this year, a view that has been further bolstered by labor market data that she dubbed as becoming "increasingly difficult to interpret."

"In terms of risks to achieving our dual mandate, as I gain even greater confidence that tariffs will not present a persistent shock to inflation, I see that upside risks to price stability have diminished," Bowman, said, speaking to the Kansas Bankers Association. "With underlying inflation on a sustained trajectory toward 2%, softness in aggregate demand, and signs of fragility in the labor market, I think that we should focus on risks to our employment mandate."

Bowman pointed to the latest employment report, which showed that employers added just 73,000 jobs in July — a figure below the pace seen in recent months — as grounds to shift the Fed's monetary policy from restrictive to neutral. The Bureau of Labor Statistics, which tracks labor statistics, also revised down its May and June estimates by 258,000.

In July, the Federal Open Market Committee, the Fed's monetary policy-setting arm, voted 9 to 2 to hold interest rates steady, with one member absent. Bowman and Gov. Christopher Waller dissented, citing a preference to lower the federal funds rate by a quarter percentage point.

In her speech Saturday, Bowman said that her dissent was based on "economic growth slowing this year and signs of a less dynamic labor market becoming clear." 

"I see it as appropriate to begin gradually moving our moderately restrictive policy stance toward a neutral setting," Bowman said. "Taking action at last week's meeting would have proactively hedged against the risk of a further erosion in labor market conditions and a further weakening in economic activity."

Bowman noted that she is cautious about drawing conclusions from the monthly labor market data, which has become harder to analyze due to declining response rates and evolving dynamics in immigration and net business creation. Nonetheless, she said the latest news on the financial health of the economy, including economic growth, the labor market and inflation, reinforces the view that there are greater risks to the employment side of the Fed's dual mandate. 

Minutes released by the Federal Reserve from June show that employment was a topic of discussion during the FOMC's recent monetary policy deliberations. The minutes, which summarize discussions from the two-day meeting in vague terms, note that a "few participants" viewed labor market risks as becoming more predominant, pointing to a decline in the workforce participation rate and a slowdown in wage growth this year compared to last.

Labor market conditions remain strong, with the unemployment rate at 4.3% in July, up slightly from 4.2%, but still at historic lows. 

Bowman, during her speech, also outlined her focus on drafting regulatory and supervisory reforms to help community banks, referencing current efforts to see how items of the regulatory framework, including the community bank leverage ratio, or CBLR, can be made more attractive to encourage more bank adoption.

She also warned of the risks associated with artificial intelligence-enabled fraud, a topic she discussed with OpenAI founder Sam Altman in July. Bowman urged both regulators and financial institutions to be more vigilant in developing tools to detect fraud and to communicate more openly about the methods bad actors are using to carry it out.

Speaking at a conference hosted by the Federal Reserve, Altman emphasized the growing ability of generative AI to mimic human interactions and bypass verification mechanisms such as voice and facial recognition. He added that many of the AI tools currently available to the public are not even the most advanced capabilities that exist.