Rate cut in response to fragile labor market – Michelle Bowman calls for decisive action

The Vice Chair for Supervision of the U.S. Federal Reserve, Michelle Bowman, has reiterated that in her view, significant interest rate cuts are necessary to avert emerging problems in the labor market. In a speech to the Forecasters Club of New York, she emphasized that recent data show a noticeably more fragile labor market and that inflation, apart from the effects of tariffs, is moving only slightly above the Federal Reserve's target. Bowman pointed to numerous data indicating growing problems there. For her, it is time for the Federal Reserve's monetary policy body, the Federal Open Market Committee (FOMC), to act proactively to address the declining momentum and initial signs of weakness in the labor market. She also warned that the Federal Reserve risks lagging behind regarding deteriorations in labor market conditions. Last month, the FOMC lowered the target range for the federal funds rate by 0.25 percentage points to 4% to 4.25%. This was decided as a measure to support the labor market, despite ongoing concerns about inflation being above target. A Fed Governor advocated for a larger rate cut, but Bowman supported the moderate cut along with her colleagues. Previously, in July, she had called for a cut when most members voted for unchanged rates. In her speech, Bowman expressed little concern that President Donald Trump's trade tariffs could cause long-term inflation problems. Although inflation is above the 2% target, according to Bowman, monetary policy should primarily support the area showing signs of weakness, currently the labor market. Bowman also commented on the ongoing reduction of the Fed's bond holdings and advocated for keeping the balance sheet as small as possible. This would give the Fed the flexibility to respond to future problems. She favors a pure Treasury securities balance sheet with shorter maturity profiles to create room for action if necessary. Bowman also addressed the liquidity facilities established by the Fed. She recommended adjustments to the Standing Repo Facility, a new instrument to stabilize the markets in times of liquidity shortages. To limit use to extreme stress situations, Bowman advocated for a minimum bid rate level above the upper end of the target rate range.