The Vice Chair for Supervision of the Federal Reserve, who brings valuable community banking experience to the position, recently addressed the Kentucky Bankers Association’s annual convention, reflecting on the nation’s economic situation and the decisions made during the latest Federal Open Market Committee (FOMC) meeting. She highlighted the Committee’s decision to lower the federal funds rate by a quarter percentage point and expressed her support for the move, marking it as a step towards addressing the fragile labor market conditions and stabilizing employment.
The Vice Chair articulated concerns over a weakening labor market, characterized by a heightened unemployment rate and stagnating payroll employment since April. Despite being near full employment, the labor market’s fragility is evident in the unemployment increases among demographically vulnerable groups and the rising number of long-term unemployed workers. Wage growth has also decelerated, aligning more closely with a 2 percent inflation rate, indicating a lessened pressure from the labor market on inflation.
Economic growth and consumer spending have softened, with notable declines in residential and commercial real estate investments. However, a tangible boost in high-tech investments related to AI and data centers suggests some persistent demand. The housing sector faces challenges, including reduced single-family home construction and elevated mortgage rates, leading to an overhang of homes for sale and decreasing house prices.
On the inflation front, core inflation is nearing the Fed’s 2 percent target, with progress seen in core services inflation amid decreasing consumer spending. The labor market’s current state suggests minimal inflationary pressure going forward. Furthermore, tariffs appear to have a limited impact on inflation, and a more stable trade policy landscape is anticipated to dampen its effects.
The Vice Chair argued for a rebalancing of the Federal Reserve’s dual mandate: shifting focus towards emerging labor market threats while not overly fixating on achieving precise inflation targets. She emphasized the potential long-term damage to employment if current trends continue unchecked. Further, she noted that productivity gains from technological advancements might support economic expansion, making the case for reducing policy restraints.
On regulatory fronts, there has been progress in amending banking regulations, addressing capital requirements, and tackling check fraud, given the recent passage of key legislation like the GENIUS Act. These initiatives aim to bolster economic growth while maintaining financial stability.
The Vice Chair concluded by affirming the importance of a proactive and forward-looking monetary policy that adapts to evolving economic conditions, rather than one rigidly tied to past data. Her remarks underscored the Federal Reserve’s commitment to its mandate of achieving maximum employment and stable prices, while remaining vigilant in an ever-changing economic landscape.