Fed Vice-Chairman Stands Firm on Rate Cuts
On Tuesday, Federal Reserve Vice-Chairman Michelle Bowman reaffirmed her support for cutting interest rates. “The story is there, that’s it. I haven’t changed my opinion,” she stated during an interview with Bloomberg News.
Bowman, together with Christopher Waller, an Open Market Committee member, has become one of the first Fed governors to publicly diverge from the prevailing view after the committee’s decision in July to stabilize rates within the 4.25-4.5% range.
This push for rate cuts gained momentum following the resignation of Governor Adriana Kugler earlier this month, amidst significant pressure from the White House over the past few months.
In her place, President Trump appointed Stephen Milan, the chair of the White House Economic Advisors Council. Many analysts see this shift towards lower rates as more aligned with Trump’s perspectives on monetary policy.
Currently, the futures market indicates an 83% likelihood of a quarter-point rate cut in September, although there’s more uncertainty than usual. The CME Fed Watch prediction algorithm typically remains close to consensus predictions.
This uncertainty stems from rising prices in recent months, alongside a 4.2% dip in the unemployment rate. The Fed is attempting to manage inflation through labor market strategies. However, the simultaneous rise in prices and fall in unemployment traditionally leans towards inflation rather than stagnation.
Interestingly, a disappointing July employment report revealed that only 106,000 jobs have been added since May, fueling the debate on whether interest rate cuts should be reinstated.
The crux of the matter revolves around whether the dip in employment is due to a dwindling supply of workers, possibly linked to Trump’s immigration policies, or a decline in demand for labor, which would suggest stagnation.
Some economists argue that worker supply constraints, spurred by immigration policies, are largely influencing labor conditions, differing from the typical slowdown narratives.
Asset management strategist Sheemasher referred to the July employment downturn as potential indicators of a “new normal.” She noted, “The decline in employment may not be that troubling, especially in low-combust environments,” urging investors to consider that weak salary growth often indicates economic recessions.
Further discussions among economists suggest that employment conditions may be stronger than the July report implied. In such scenarios, initiating rate cuts in September—following the recent spike in the Producer Price Index—might exacerbate inflation.
Bowman also addressed the Fed’s new leverage ratio proposal, which would allow banks to extend loans beyond their capital reserves, in alignment with the international Basel III regulations aimed at strengthening the banking sector.
The Basel III proposals have faced delays since their initial introduction post the 2007-2008 financial crisis. “What we’re doing is going to revert to the original Basel agreement,” Bowman mentioned, mentioning that a new proposal would be forthcoming in early 2026.
Regarding leverage rates, she stated that regulators await feedback on their proposal, with the comment period concluding on August 26th.
The Fed has previously discussed that lowering the leverage ratio could enable banks to purchase more U.S. bonds. However, Senate Banking Committee Democrats argued that this rule change could lead banks to issue more loans, consequently increasing their profits.
