Fed Speak – Michelle Bowman points to labour market fragility

26 Sep 2025 , 09:18 AM

WHY MICHELLE BOWMAN’S VIEWS MATTER

When the Fed Vice Chair for Supervision, Michelle Bowman speaks, the market listens. More than a year ago, she was the lone voice in the FOMC urging the Fed go slow on rate cuts. Earlier, in the July 2025 Fed meet, she had put up a dissent note along with Chris Waller, calling for a 25-bps rate cut. Eventually, the Fed had maintained status quo in July, but the pressure exerted by the dissent note triggered a 25-bps rate in September 2025.

In her recent address to the Kentucky Bankers Association, Bowman underlined that people were, probably, too smug about growth and jobs. According to Bowman, risks are clearly weighted towards weakening employment and the Fed needs to pre-empt a spike in unemployment from the current level of 4.3%. It may be recollected that in the September 2025 meet, FOMC had decided to cut rates by 25-bps to a level of 4.00%-4.25%.

HOW FRAGILE IS LABOUR MARKET IN THE US?

One of the underlying theses of Michelle Bowman in the last few months has been that rate cuts should have commenced in July instead of September 2025. The data since June has been clearly pointing to labour markets being fragile, calling for a move towards neutral rates. Lower rates would have boosted consumption and also stemmed the rise in levels of unemployment. According to Bowman, the real concern at this juncture is not economic growth, but labour market conditions. For instance, the third estimate of Q2 GDP growth has pegged the US economy to grow at 3.8%. However, that may not tell the full story!

What exactly is the problem in the labour market as Michelle Bowman sees it? Here are a few highlights that emerged from her speech.

• The unemployment rate has risen to 4.3% in August. That may be low in absolute terms, but it is still about 100 bps higher than 2 years back. Also, monthly payroll additions are more indicative. The US is adding just 29,000 jobs monthly on an average. In fact, about 1,00,000 job additions a month are needed to keep the labour markets in balance, and to sustain economic growth. That seems to be the bigger challenge on the labour front!
• According to Bowman, unemployment rate may be slightly misleading. The current reality is that there is reduced hiring by businesses; as they prefer to retain existing workers than increasing layoffs. Also, wage growth has come down sharply, and is more consistent with 2% inflation. So, wages as a trigger for inflation is no longer a concern.
• If one breaks up the unemployment structure, rate of joblessness increased in groups most affected by business cycles. Also, the employment-to-population ratio dropped significantly. The rate of unemployment does not show rise in long term unemployment. Most jobs are being created only in healthcare, social services, leisure, and hospitality.
• Lastly, Bowman has underlined that recent policies will discourage immigration and that is likely to limit supply. This has artificially kept unemployment levels in check. In short, demand for labour has been falling, but the simultaneous fall in supply of immigrants has given the semblance of a labour market in balance.

That brings us to the real question; is labour market fragility a bigger concern for the US economy than inflation?

YES, UNEMPLOYMENT IS THE BIGGER RISK, FEELS BOWMAN

Bowman thinks that jobs is, clearly, the much bigger challenge today compared to inflation. While a lot of focus has been on the likely impact of tariffs on inflation, such an impact will be one-time and, probably, already factored in. While core inflation was 2.9% in July, it would be around 2.5% if the impact of tariffs were excluded. So, tariff impact is priced in, to a large extent. Also, labour market wages and a surge in consumption are no longer major sources of inflation. That underlines that the risk is gravitating towards the side of jobs.

According to Bowman, by focusing on jobs, the dual mandate can still be respected. It now looks like the tariffs will not present a persistent shock to inflation. That is because the falling consumption and weakness in wages point to softness in aggregate demand and fragility in labour markets. At this juncture, the focus will have to be on reviving jobs, even assuming that the immigrants will be eventually back in the job market. Fed has to pre-empt a macro growth crisis created by high levels of unemployment.

IS THIS THE NEW THINKING; AND WHAT IT MEANS FOR INDIA?

If one goes by the speech delivered by Powell at Jackson Hole and the September Fed statement, it does look like the focus is shifting from inflation to jobs. With the current chaos created due to tariffs, we could see a series of rate cuts by the US Fed. That could continue, till the time the rate of interest gets close to the neutral rate.

That means, the RBI has to contend with aggressive rate cuts by the Fed. For RBI, the choices will be difficult. Growth could be under pressure, so rate cuts are essential to sustain higher levels of real GDP growth. At the same time, each rate cut will make the rupee more fragile, which is already edging closer to ₹89/$. It is in these rather precarious circumstances that the RBI will have to take its repo rate call on October 01, 2025.