Federal Reserve Vice Chair for Supervision Michelle Bowman said Friday that the central bank should be ready to cut interest rates further, citing "signs of fragility" in the job market.

“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 at the New England Economic Forum in Foxborough, Mass. “We should also avoid signaling that we will pause without identifying that conditions have changed.”

Bowman noted that even as inflation moves closer to the Fed’s 2% goal, she continues to see “signs of fragility” in the job market. She said the recent drop in job openings and softness in hiring, as reported by the Bureau of Labor Statistics, could translate to a larger increase in unemployment.

Read more: Jobs, inflation, and the Fed: How they're all related

Bowman warned that once companies shift from slowing hiring to cutting positions, layoffs could rise and the job market could deteriorate quickly.

She noted that private-sector job gains averaged only about 30,000 per month in the fourth quarter, well below what she says is needed to keep the unemployment rate from rising. The lion’s share of the job gains came in the healthcare and social services industries, suggesting that hiring has continued to gradually soften since early last year.

“We should continue to focus on risks to our employment mandate and preemptively stabilize and support labor market conditions,” Bowman said.

The central bank, she said, should set interest rates proactively, looking forward based on forecasts, noting that placing too much weight on even the most recent data is backward-looking, which increases the risk of falling behind the curve. Bowman's sentiments stand in contrast to others on the Fed, including Cleveland Fed president Beth Hammack, Dallas Fed president Lorie Logan, and Kansas City Fed president Jeff Schmid, who have said they don't see a need for further "insurance" cuts to insulate the job market.

On inflation, Bowman estimates the Fed’s preferred inflation index — the Personal Consumption Expenditures Index on a “core basis” — stood at 2.9% in December. The official reading is set to be released next week. But she said when adjusting for the presumed effects of tariffs, inflation would have hovered closer to 2% — the Fed’s inflation goal.

Read more: How a Fed rate cut affects your bank accounts, loans, credit cards, and investments

Bowman expects the economy will continue to expand at a solid pace this year and the labor market will stabilize near full employment as rates become less restrictive.

She noted that the economy seems to have been supported by a surge in equity prices and investment in AI and that she worries about a pullback in stocks. She said that although stock market valuations may appear stretched, expected earnings growth for AI-related companies has been high, and, so far, a substantial part of the investment has been self-financed.

“I am concerned that disappointing news on AI investment returns could lead to a sharp correction in equity prices,” she said.

Though, she added, “the economy continues to show elevated productivity growth likely due, in part, to increased adoption of AI technologies.”

While Bowman said rates are closer to her estimate of neutral after the Fed cut three times at the end of last year, she sees policy as moderately restrictive.

“Looking ahead, as we gather additional evidence on economic activity, labor market conditions, and inflation, it will be important to continue assessing the appropriate path of policy and the timing of further adjustments,” she said.

In a speech Friday in Florida, Fed Vice Chair Philip Jefferson struck an optimistic note on the economy, saying conditions in the labor market appear to be stabilizing and he expects inflation to return to a pathway toward the central bank’s 2% goal.

Jefferson said the last three rate cuts have brought the Fed into the range of neutral — a level designed to neither boost nor slow economic growth — and left the central bank “well positioned to determine the extent and timing of additional adjustments,” lifting language from the Fed’s December meeting policy statement.

Jennifer Schonberger covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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