Powell and Bowman diverge on tariff and price risks 

The US Federal Reserve’s chair, Jerome Powell, and its vice-chair for supervision, Michelle Bowman, offered differing views on monetary policy and economic conditions in separate speeches on September 23. However, the two governors largely agreed about the risks to the labour market.   

Powell told the Greater Providence Chamber of Commerce in Rhode Island that he remained uncertain about price stability risks, especially in relation to tariffs, and that he was cautious about further rate cuts.  

He said inflation risks were tilted to the upside and employment risks to the downside, which he characterised as a “challenging situation”. 

“Two-sided risks mean that there is no risk-free path,” the Fed chair said. “If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2% inflation. If we maintain restrictive policy too long, the labour market could soften unnecessarily.”  

Powell argued that this tension called for the Fed to balance both sides of its dual mandate. He said the increased downside risks to employment shifted the balance such that the Federal Open Market Committee felt the appropriate measure at its meeting last week had been to lower rates towards a more neutral stance.  

“This policy stance, which I see as still modestly restrictive, leaves us well positioned to respond to potential economic developments,” he said.  

Powell said the inflation of recent months, which had been above the Fed’s target, was largely the result of tariffs, rather than broad price pressures. However, he said that under a reasonable base-case scenario, the impact of tariffs on inflation would only be short-lived.  

“This one-time increase in the price level will likely be spread over several quarters and show up as somewhat higher inflation during that period,” he said. However, he added that “uncertainty around the path of inflation remains high”. 

Powell said the US economy was showing resilience amid substantial changes in immigration, trade, fiscal, regulatory and geopolitical policies. He nevertheless added that these policies were only just beginning, and that it would take time for their full implications to become apparent.  

Labour market indicators were broadly stable, he said, but the pace of job creation was not at the level to break even with the current unemployment rate.  

Focus on labour 

Bowman was less worried about price stability risks than Powell. In an address to the Kentucky Bankers Association Annual Convention in Asheville, North Carolina, the vice-chair for supervision said: “As I gain even greater confidence that tariffs will not present a persistent shock to inflation, I see that upside risks to price stability have diminished.” 

She argued that the FOMC should focus on employment risks and “preemptively” support the labour market. She was also confident that the effects of tariffs on prices would be small and short-lived.  

Bowman said she recognised and appreciated concerns that the Fed had “not yet perfectly achieved” its inflation goal. However, the dual mandate placed equal weight on price stability and maximum employment, and the Fed’s focus should therefore turn to the side that was showing the greatest deterioration or fragility, “even though inflation is above but within range of our target”. 

“We are at serious risk of already being behind the curve in addressing deteriorating labour market conditions,” she said. “Should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree.” She was also concerned about the labour market entering a precarious position in which a shock could create a “sudden and significant deterioration.” 

Bowman said she had been pointing out signs of potential fragility in the labour market for months. Since June, she had seen the grounds for reducing the policy rate further, and towards what was likely to be the neutral rate of interest.  

“Recent data have revealed a materially more fragile labour market along with inflation that, excluding tariffs, has continued to hover not far above our target,” said Bowman.  

The vice-chair pointed to a significant increase in the number of long-term unemployed workers. She also said lower immigration could be masking a larger rise in unemployment than analysts expect. 

“In my view, the committee should have begun lowering the policy rate at the July meeting, so, of course, I supported reducing the policy rate at this meeting,” she said.  

Increases in demand this year in the US, said Bowman, had largely been driven by tech projects, such as artificial intelligence infrastructure, that were not sensitive to changes in interest rates.  

The vice-chair also expressed concern about the housing market. “Given very low housing affordability, existing home sales have remained depressed since 2023 and at levels only comparable with the early 2010s following the financial crisis,” she said. “I am concerned that, in the current environment, declines in house prices could accelerate, posing downside risks to housing valuations, construction and inflation.”