FOXBOROUGH, Mass.— Federal Reserve Vice Chair for Supervision Michelle Bowman said Friday that while inflation is moving closer to the Fed’s 2% target, growing fragility in the labor market poses a rising risk that policymakers must address proactively—an outlook that could shape interest-rate decisions and regulatory priorities.
Speaking at Outlook 26: The New England Economic Forum at Gillette Stadium, Bowman said the Federal Open Market Committee cut rates three times in late 2025—totaling 75 basis points—to limit damage to employment as inflation pressures eased. The federal funds rate now stands at 3.5% to 3.75%, closer to what she views as neutral. Bowman said inflation, excluding tariff-related effects, appears near target, while employment conditions have weakened through slower hiring rather than mass layoffs.
Bowman highlighted several trends of direct interest to financial institutions, including slowing consumer spending, subdued housing activity, and continued softness in residential investment despite declining mortgage rates. She noted that business investment—particularly in data centers and artificial intelligence—has remained strong and largely self-financed, supporting productivity growth. However, she warned that housing affordability remains strained and that labor market weakness is increasingly concentrated among lower-income and cyclical workers, raising downside risks for growth and credit performance.
On the policy outlook, Bowman said inflation risks appear less threatening than employment risks, arguing that tariffs have had largely one-off effects and that firms are struggling to pass higher costs to price-sensitive consumers. She said hiring rates are already low, leaving the labor market vulnerable to a sharper rise in unemployment if demand falters.
“The labor market can appear to be stable right up until it doesn’t,” Bowman said, emphasizing the need for the Fed to remain ready to adjust policy toward neutral if conditions worsen.
Bowman also outlined a sweeping supervisory and regulatory agenda since becoming vice chair for Supervision last June, citing actions aimed at reducing burden and sharpening risk focus. These include changes to large-bank ratings, revisions to the supplementary leverage ratio, proposed relief for community banks through leverage-ratio recalibration, removal of reputational risk from exams, and new operating principles for supervision. She also pointed to progress on payments fraud, stress-test transparency, withdrawal of climate-related supervisory guidance, and implementation of the GENIUS Act on stablecoins—areas she said will remain priorities for financial institutions navigating a shifting economic and regulatory landscape.