Her comments, in a Jan. 16 speech, sharply contrast with those made a day earlier by several of the Fed regional bank heads who cited inflation concerns as evidence the independent central bank needs to continue to hold rates steady.
The division among policymakers reflects tensions in the Fed’s dual mandate of stable prices and low unemployment.
Bowman said the Fed’s monetary policy remains moderately restrictive, and that an expected pause in rate cutting may be premature.
“My view is that we should continue to focus on risks to our employment mandate and preemptively stabilize and support labor-market conditions,” she said.
Federal Funds Effective Rate ChartBoard of Governors of the Federal Reserve System ·Board of Governors of the Federal Reserve System
The Fed’s dual mandate calls for maximum employment and low inflation.
The Federal Open Market Committee, the central bank’s policymaking panel, cut the funds rate three times for a total of 75 basis points in 2025.
After the December rate cut Fed Chair Jerome Powell said that the lowering of rates brought monetary policy “within a broad range of neutral.”
Neutral means the Federal Reserve’s benchmark interest rate neither stimulates nor restrains economic growth.
Economists define the neutral rate, or r-star (r*), as the interest rate that keeps the economy at full employment while maintaining stable inflation around the Fed’s 2% target.
It’s important to note that the neutral rate isn’t a fixed rate.
The neutral rate fluctuates according to productivity growth, demographic trends and global capital flows.
Most Fed officials currently estimate that the long-run neutral rate falls between 2.5% and 3% but roughly 4.5% to 5% when accounting for inflation.
The next FOMC meeting is Jan. 27-28.
CME Group’s widely watched FedWatch Tool estimates a 5% chance of a quarter-percentage point cut.
Looking ahead to the rest of 2026, the Fed’s own median projection or “dot plot” suggested there would be only one additional 25 basis points cut.
This would move the rate to around 3.25% to 3.50% by year end.
Traders are slightly more dovish penciling in two or three rate cuts but not until June or later. That’s when Powell’s replacement as chair is expected to be installed.
President Donald Trump has spent the past year criticizing and threatening Powell and the FOMC for not lowering rates to around 1%.
The White House maintains this will stimulate the stagnant housing market and reduce the amount of interest on the nation’s debt which currently hovers between approximately $38.4 trillion to $38.5 trillion.
Understanding neutral helps policymakers at the independent central bank determine whether current monetary policy is restrictive or accommodative.
If the Federal Funds Rate exceeds the neutral rate then borrowing becomes more expensive. As inflation cools, it potentially slows economic growth.
Below neutral, cheaper credit encourages spending and investment but potentially slows growth.
Employers added fewer jobs than expected in December, capping a yearlong slowdown in the labor market defined by cautious hiring and limited layoffs.
“The share of those working part time for economic reasons, meaning not by choice, has increased considerably over the past two months,’’ Bowman said.
“This has coincided with a rise in the share of multiple job holders, suggesting that an increasing number of workers struggle to make ends meet,” she added.
Bowman said the Fed should not signal that monetary policy is on hold, as many of her colleagues have done this month, given the risk of further deterioration in the jobs market.
“We should also avoid signaling that we will pause without identifying that conditions have changed,” she said. “Doing so will indicate that we are not attentive or responsive to the recent and expected path of the labor market.”
Bowman said sticky inflation pressures are easing thanks to a waning impact from tariffs.
She described the U.S. economy as “resilient” and said she was “increasingly confident that inflation will come down toward 2 percent as tariff effects on goods inflation continue to wane in coming months.’’
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