Fed’s Bowman open to rate cuts, warns of fragile labor market

Despite economic growth and inflation moving closer to the Fed’s 2 percent target, increasing weakness in the labor market could require interest rate cuts this year, said Federal Reserve Vice Chair for Supervision Michelle Bowman. .Speaking last week at the New England Economic Forum, Bowman said the Federal Open Market Committee’s recent interest rate cuts were intended to limit further damage to employment as inflation eased. The FOMC has lowered its benchmark federal funds rate 75 basis points since September, to 3.50 to 3.75 percent. Bowman cited the recent slowdown in hiring and uptick in unemployment to 4.4 percent as signs of weakness, with growth concentrated in a narrow set of the service industry. She said this increases the risk of even modest weakness in demand leading to a faster weakening in labor conditions.“The labor market can appear stable right up until it doesn’t,” Bowman said.Underlying inflation is closer to 2 percent than headline figures once one-time tariff effects are excluded, she added. Wage growth has slowed to a pace consistent with the Fed’s inflation goal, and the labor market is no longer a major source of price pressure, Bowman said.While business investment — especially relating to artificial intelligence — has supported economic growth and productivity, Bowman said consumer spending and housing activity have weakened amid slower income growth and high costs. Higher-than-average mortgage rates and the lack of affordable housing continue to limit residential investment, Bowman added. Fellow FOMC members Austan Goolsbee and Lorie Logan have suggested openness to cutting interest rates this year amid similar concerns. Fed Chair Jerome Powell, whose term will expire in May, said the decision will be data-based, with inflation and employment trends top of mind. J.P. Morgan is predicting no cuts this year due to economic growth and inflation. Bowman expects economic growth will remain strong and inflation to continue easing as tariff effects fade and productivity gains continue.“Less restrictive regulations, lower business taxes, and a more favorable business environment will continue to boost supply — largely due to higher productivity — and more than offset any negative effects on economic activity and inflation from tariffs,” Bowman added. “As the tariff effects continue to wane, these supply-side policies, along with strength in AI-related investment, will continue to boost productivity gains and help ensure inflation remains on a downward path.”