Vice Chair Bowman Discusses Economic Outlook and Monetary Policy

During a recent address at the New England Economic Forum in Boston, Vice Chair Michelle Bowman discussed the current economic outlook and monetary policy. She highlighted key issues including the state of the labor market and the trajectory of inflation as the Federal Reserve approaches its next policy meeting at the end of the month.

Economic Growth and Labor Market Fragility

Bowman noted that while the economy continues to grow, the labor market shows signs of increasing fragility. This trend poses significant risks as policymakers consider future monetary adjustments. As we enter 2026, inflation is moving closer to the Federal Reserve’s target of 2 percent, but the labor market’s uncertainties could complicate matters.

Recent Monetary Policy Decisions

At recent meetings, the Federal Open Market Committee (FOMC) decided to lower the federal funds rate target by 25 basis points in both October and December, bringing the current range to 3.5-3.75 percent. These actions aimed to mitigate potential harm to the labor market while addressing subdued inflation trends.

Evolution of Economic Perspectives

Over the past year, Bowman’s views on the economy shifted as she observed slowing growth rates and increasing labor market fragility. Initially, she anticipated real GDP growth in the mid-2 percent range, adjusted for core inflation measures. However, the actual economic landscape reflected adjustments in consumer inflation and business investment patterns, particularly within sectors like AI.

Current Economic Conditions

The U.S. economy remains resilient, showing GDP growth rates exceeding 2 percent for the past year. Business investment, especially in technology and AI, has supported this growth while consumer spending weakened due to reduced disposable income and high housing costs. Residential investment is projected to decline in the fourth quarter, despite recent improvements in sales driven by lower mortgage rates.

Labor Market Dynamics

• Unemployment rose to 4.4 percent in December.
• Payroll growth has slowed, particularly in nonbusiness services sectors.
• The share of part-time workers seeking full-time employment increased, indicating financial struggles.
• Job gains have concentrated in specific industries, reflecting a less dynamic employment landscape.

Bowman expressed concern regarding the rising number of long-term unemployed workers, which reached its highest since early 2022. She emphasized the potential for layoffs to increase if economic conditions do not improve.

Inflation Outlook

Inflation remains a focal point for the Federal Reserve. Bowman indicated that core PCE inflation was approximately 2.9 percent in December. However, excluding tariff-related effects suggests core inflation could align closer with the target soon. The Fed will continue to monitor these developments as they plan future monetary policy.

Future Monetary Policy Path

Looking ahead, Bowman advocates a proactive approach to monetary policy. She emphasizes that keeping an eye on the labor market’s dynamics will be essential for effective policy adjustments. Should conditions worsen, the Federal Reserve must be prepared to shift strategies to maintain economic stability.

Bowman concluded by stressing the importance of monitoring both inflationary pressures and employment conditions as the Federal Reserve evaluates its next policy moves. This thoughtful assessment will help ensure the dual mandates of maximum employment and price stability are met effectively.