Fed should be ready to cut rates again amid job market risks

FOXBOROUGH, Massachusetts, Jan 16 (Reuters) – Federal Reserve Vice Chair for Supervision Michelle Bowman said on Friday a fragile job market that could weaken quickly means the U.S. central bank should stand ready to cut interest rates again if needed.

“Absent a clear and sustained improvement in labor market conditions, we should remain ready to adjust policy to bring it closer to neutral,” Bowman said in a speech delivered before the Outlook 26: The New England Economic Forum in Foxborough, Massachusetts. She added that while monetary policy is not on a preset course, “we should also avoid signaling that we will pause” on further rate cuts “without identifying that conditions have changed.”

Bowman added that “my baseline expectation is that economic activity will continue to expand at a solid pace and the labor market will stabilize near full employment as monetary policy becomes less restrictive.”

But she also said risks to the Fed’s inflation and job mandates are uneven, noting that price pressures are likely to abate as the impact of trade tariffs wanes, with underlying inflation close to the central bank’s 2% target.

Meanwhile, the job market, which is currently near full employment, “has become increasingly more fragile and could continue to deteriorate in the coming months,” Bowman said. She warned that conditions could change quickly, which is why the Fed should be nimble on the policy front.

Bowman described the current stance of monetary policy as “moderately restrictive” and said Fed officials should be forward-looking in setting interest rate policy. “We should rely on forecasts that are informed by a broad set of indicators and by ongoing engagement with businesses and communities across the country,” she said.

FED OFFICIALS HAVE SIGNALED NO URGENCY TO ACT

The Fed enters 2026 amid expectations among its policymakers that inflation pressures will moderate, the job market will stabilize and growth will turn in a decent performance as uncertainty from President Donald Trump’s erratic economic policies abates.

Over the closing months of 2025, the Fed lowered its benchmark interest rate by three-quarters of a percentage point, to the 3.50%-3.75% range. The central bank reduced the cost of short-term borrowing in a bid to offer support to a weakening job market while still providing enough restraint to bring down still-high inflation pressures.

At the December 9-10 policy meeting, Fed officials penciled in a single quarter-percentage-point rate cut for 2026. In comments over the start of the year, they have signaled no urgency to act as they seek further evidence that inflation, which remains well over the 2% target, will abate.

As the Fed seeks data that would give it the green light to cut again, it continues to face considerable pressure from Trump over lowering rates. The president will get to select a successor to Fed Chair Jerome Powell, whose term as central bank chief ends in May, and is expected to announce the outcome of that search soon.

The battle between the president and the Fed escalated in recent days amid the revelation that the central bank is being criminally targeted by the administration over issues with costs associated with the renovation of the Fed’s headquarters. Powell said the latest attack is really about the Fed exercising independent judgment in setting rates.

In her remarks, Bowman noted some fragilities in financial markets. She said stock prices “may appear stretched” and added, “I am concerned that disappointing news on AI investment returns could lead to a sharp correction in equity prices.”

On the banking oversight front, Bowman said “we will continue to focus on improving the mergers and acquisitions review process, assessing the appropriateness of capital requirements across the banking system, addressing payments and check fraud, and strengthening examiner training and development.”

(Reporting by Michael S. Derby; Editing by Paul Simao)