Bowman: Outlook for the Economy and Monetary Policy

Good morning. It is my pleasure to join you here in Rogers for the 32nd annual Arkansas Business Forecast Luncheon. For their kind invitation, I would like to thank University of Arkansas Chancellor Charles Robinson, Walton College of Business Dean Brent Williams, and the host of this event and Director of the Center for Business and Economic Research, Mervin Jebaraj. This is my fourth visit to Arkansas in the past year and a half, and I always learn a great deal about this dynamic state and economic conditions when I’m here. I look forward to taking questions from my St. Louis Fed colleague Matuschka Lindo Briggs in a few minutes. But first, I will offer some remarks on the economic outlook and monetary policy. Note these are my personal views and are not necessarily shared by my FOMC colleagues.1 I will begin with a summary of my remarks and then elaborate. First, the U.S. economy has been resilient, with considerable momentum coming into 2026. I expect the economy will continue to grow at or above trend this year. Of course, nothing is certain, but I see tailwinds supporting economic Fed's Musalem: Further interest rate cuts are not advisable. Policy is now neutral and the economy does not need stimulus. MUSALEM: NOT ALL OF CURRENT INFLATION IS FROM TARIFFS ... MUSALEM: RISK OF A SIGNIFICANT JOB MARKET DOWNTURN HAS FALLEN ...

I dissented at the most recent meeting of the Federal Open Market Committee (FOMC) after concluding that cutting the policy rate by 25 basis points was the appropriate stance of policy. Three cuts to the policy rate last year have moved it closer to a neutral setting but monetary policy is still restricting economic activity, and economic data make it clear to me further easing is needed. First, in contrast to the continued solid growth in economic activity, the labor market remains weak. Despite ticking down in its most recent reading, the unemployment rate has risen since the middle of last year. Payroll gains in 2025 were very weak. Compared to the prior ten-year average of about 1.9 million jobs created per year, payrolls increased just under 600,000 for 2025. And, last year's data will be revised downward soon to likely show that there was virtually no growth in payroll employment in 2025. Zero. Zip. Nada. Let this sink in for a moment—zero job growth versus an average of almost 2 million for the 10 years prior to 2025. This does not remotely look like a healthy labor market. While lower labor supply was surely a factor, it also indicates considerable weakness in labor demand. Employers are reluctant to fire workers, but also very reluctant to hire. I have heard in multiple outreach meetings of planned layoffs in 2026. This indicates to me that there is considerable doubt about future employment growth and suggests that a substantial deterioration in the labor market is a significant risk. Second, though inflation is elevated from tariff effects, appropriate monetary policy is to "look through" these effects as long as inflation expectations are anchored, which they are. Inflation excluding tariff effects is running close to the FOMC's 2 percent target and on a path to sustainably reach that goal. With total inflation excluding tariff effects close to our target at just slightly above 2 percent and a weak labor market, the policy rate should Fed's Waller: Virtually no growth in payroll employment in 2025 Fed's Waller: There is considerable doubt about future job growth Just in | Fed's Waller: Inflation, excluding tariffs, approaches 2% target. Fed's Waller: Policy should be closer to neutral, perhaps around 3% vs current rate range of 3.50% to 3.75%

Trump: Warsh will cut rates without White House pressure. *TRUMP: WARSH DIDN'T COMMIT TO CUTTING INTEREST RATES ... TRUMP: INAPPROPRIATE TO ASK WARSH ABOUT RATE CUTS TRUMP: IF TILLIS DOESN'T APPROVE, WE'LL WAIT UNTIL SOMEONE DOES TRUMP ON DOJ POWELL PROBE: RENOVATIONS INCOMPETENCE OR THEFT