Written by: He Hao, Wall Street Insights
Following Waller, another Federal Reserve official has expressed support for a rate cut next month. It is worth noting that both board members were appointed by Trump during his first term.
On Monday, Federal Reserve Board Governor Bowman stated that if inflation pressures remain controlled, she would support lowering interest rates as early as July, as labor market risks may rise and inflation appears to be steadily moving towards the Fed's 2% target:
If inflation pressures remain controlled, I would support lowering the policy rate at the next meeting to bring it closer to the neutral level and maintain a healthy labor market. As U.S. government policies, the economy, and financial markets continue to evolve, she will continue to closely monitor economic conditions.
Last Friday, Federal Reserve Board member Christopher Waller told CNBC that he might support a rate cut next month due to concerns about a potentially weak labor market.
Nick Timiraos, a Wall Street Journal reporter known as the "Fed whisperer," said in his latest article that this is Bowman's first substantive comment on economic prospects since being appointed by President Trump in spring and confirmed by the Senate as Vice Chair for Supervision. Bowman previously highly focused on inflation concerns, and her latest statement represents a meaningful shift.
The article noted that among Fed officials who have spoken since last week's meeting, the first two to indicate willingness to cut rates at the Fed's next meeting in late July were officials appointed during Trump's first term.
Second Fed Official Paves the Way for Rate Cut
At last week's June meeting, the Federal Reserve maintained its benchmark rate in the range of 4.25% to 4.5%, which is generally considered higher than the neutral rate that neither stimulates nor suppresses economic activity. After the meeting, Fed Chair Powell reiterated that policymakers can be patient in rate adjustments, waiting for more details about President Trump's economic policies, especially trade policy changes.
Bowman stated her support for the Fed's June resolution. She mentioned that the post-meeting statement reflected a policy shift, with current policy uncertainty reduced and focus shifting to potential labor market weakness.
Economists originally feared that Trump's tariffs would drive up inflation, but currently, the impact of the Trump administration's expanded tariff use has not yet been evident in economic data, with labor market and inflation data remaining strong. Meanwhile, Trump has softened his rhetoric and opened the door to negotiations with major trading partners.
Bowman recently pointed out:
Data shows that tariffs and other policies have not yet had a significant impact on the economy. I believe the impact of tariffs on inflation may have a greater delay and be smaller than initially expected, especially since many companies have already stockpiled inventory. Ongoing progress in trade and tariff negotiations has significantly reduced economic risk. Trade policy changes may have only a minimal impact on the Fed's preferred inflation indicator.
The Fed's responsibility is to maintain price stability and achieve maximum employment. Bowman noted that due to recent weak consumer spending and signs of labor market fragility, downside risks to the employment goal may soon become more prominent. "In my view, it is appropriate to now acknowledge that the risk balance has changed. When thinking about the future policy path, it is time to consider adjusting the policy rate."
The Fed's next FOMC meeting will be held on July 29-30. According to the CME Group's FedWatch tool, traders currently only see a 23% chance of action at this meeting, while the possibility of a September rate cut is about 78%.
After Fed Board Governor Bowman discussed the rate cut outlook:
S&P 500 rose 0.57% to a new daily high, Dow rose 0.42%, and Nasdaq rose 0.55%.
U.S. 10-year Treasury yield fell over 5.5 basis points, refreshing daily lows below 4.32%. The two-year Treasury yield dropped nearly 4 basis points, refreshing daily lows, approaching 3.85%, and has continued to decline from around 3.92% since 19:35 Beijing time, experiencing two significant downward movements.
Bowman mentioned that Trump's tariff policy may have a temporary and limited impact on prices, making her the second Fed senior official to express a similar view, paving the way for a potential rate cut as early as July.
Another Fed Board member, Waller, also said in a CNBC interview last Friday that the Fed could consider a rate cut in July.
Trump has been pressuring the Fed to lower rates to reduce financing costs for the continuously expanding U.S. national debt. Since the Fed decided to hold steady last week, Trump has repeatedly criticized Powell and the Fed Board.
Trump has stated that he believes the Fed should cut rates by at least two percentage points. Bowman's speech did not mention the extent of the rate cut she would support, while Waller said such an aggressive rate cut was unnecessary.
Bowman Discusses Regulation
Bowman is the Vice Chair for Supervision at the Fed. On the same day, she warned that the current leverage ratio regulation has brought unexpected consequences to the market. She believes it is time to revisit this key capital buffer mechanism, as there are concerns that the rule limits banks' trading activities in the $29 trillion U.S. Treasury market. Bowman stated:
The leverage ratio's impact on bank broker-dealers could have broader market implications, including market volatility observed in Treasury market intermediation activities. Once we identify unintended consequences not considered when developing regulations, we must consider revisiting early regulatory and policy decisions.
Earlier this month, Bowman outlined an ambitious agenda—from reviewing the capital buffer mechanism called the "supplementary leverage ratio" to exempting community banks from regulations targeting large financial institutions.
Media previously reported that the Fed and other regulators will this week publish potential modification proposals for leverage ratio rules, intending to adjust the overall ratio rather than excluding specific assets like Treasuries, as some observers predicted.
She also stated that the Fed will hold a meeting on July 22 to discuss bank capital issues and noted that "simple reforms" could improve the Treasury market's resilience during stress events. Bowman previously criticized regulators' plans requiring the largest U.S. banks to significantly increase capital to address potential crises.
Bowman is widely expected to support a significant relaxation of the proposal known as the "Basel III Endgame". Initially published in 2023, the plan proposed increasing capital requirements for large banks by 19%. The Fed subsequently backed down amid industry opposition.
