Bowman, The U.S. Economy and Considerations for Monetary Policy

November 10, 2026 The U.S. Economy and Considerations for Monetary Policy Vice Chair for Supervision Michelle W. Bowman At the C. Peter McColough Series on International Economics Council on Foreign Relations, Washington, D.C. Share --> --> --> --> --> --> Watch Live Good afternoon. It is a pleasure to join you today at the Council on Foreign Relations to discuss my outlook for the U.S. economy. 1 Economic growth has gained momentum this year, driven by robust investment demand and solid consumer spending, and the labor market now appears to have stabilized. These outcomes suggest that the policy rate cuts toward the end of last year helped to address some labor market weakness. We are experiencing rapid technological change and ongoing geopolitical tensions, while inflation pressures have persisted for longer than I had hoped and have shown recent signs of broadening. Despite these challenges, increased investment in and use of artificial intelligence (AI), or super intelligence, are boosting economic growth and productivity and American families appear to be resilient. The Federal Reserve's monetary policy goals are to achieve maximum employment and price stability. While the labor market has improved more than I expected this year, our progress on lowering inflation has disappointed. Therefore, bringing inflation down remains a priority. I am also monitoring expectations about AI and energy prices, and how they influence the risks to achieving our mandates. Consistent with my views following our September FOMC meeting, I continue to focus on interpreting the underlying trends in the economy and the evolution of financial conditions. 2 In my remarks today, I will review our most recent FOMC policy meeting and discuss current economic conditions and my near-term outlook for the economy. I will then turn to recent developments in energy markets and the AI buildout and will conclude with my thoughts on the appropriate path of monetary policy. Update on the Most Recent FOMC Meeting At last month's FOMC meeting, I joined my colleagues to support holding the federal funds rate target range at 3-3/4 to 4 percent. This approach was consistent with my view that further changes in the policy rate should wait until we had a better understanding of how conditions would evolve and how the recent rate increase would influence the underlying trends in the economy. Maintaining the policy stance at the October meeting allowed us to assess the incoming data. While I continue to expect that several of the factors currently boosting inflation will abate next year, currently inflation has proven to be more persistent than I had anticipated. It is also important to gain greater clarity on the effect of recent market volatility on financial conditions. Economic and Financial Conditions U.S. economic growth has stepped up this year. After rising a solid 2.4 percent during the first half of the year, real gross domestic product (GDP) likely increased at an even stronger pace of more than 3 percent in the third quarter, well above last year's 2 percent pace. 3 Economic growth has been supported by robust increases in AI-related capital expenditures and solid consumer spending. However, some interest-rate-sensitive sectors like residential investment have declined, and the recent rise in mortgage rates appears to be dragging home construction and sales down further. Consumer spending has strengthened this year, despite softness in real incomes and declining sentiment, which are partly due to higher energy prices. Labor Market Conditions Labor market conditions look to have improved since last year. Over the course of this year, the unemployment rate has edged down to 4.1 percent in October, remaining close to my estimate of its natural rate. Job gains have been above last year's anemic pace, averaging about 80,000 per month through October, and have broadened across industries beyond health care and social assistance. The labor market continues to show low dynamism, with low-hiring and low-firing conditions as we sometimes see in a late-cycle expansion. The job-finding rate has been low, especially for new labor force entrants, and the share of long-term unemployed workers has moved up significantly. Workers' perceptions of job availability in the Conference Board survey have remained soft in recent months. On their own, these data would be consistent with a higher unemployment rate than currently reported. However, layoffs have moved down this year, offsetting the softness in hiring. In plain terms, workers are both less likely to find a new job and less likely to be laid off, a somewhat unusual pattern. Although stable, the labor market does not appear to be tight, as wage growth has slowed to a modest pace. On a 12-month basis, the wages and salaries component of the employment cost index increased 3.1 percent in September, the same pace as the change in average hourly earnings for October. Both measures have slowed noticeably from a year ago. An increasing number of workers have taken on a supplemental part-time job to make ends meet, as the share of multiple job holders has increased back to levels seen in early 2025. Given strong productivity gains in recent years, wage growth at this pace is in line with or even below the pace we would expect if inflation was running at 2 percent. Inflation Progress on lowering inflation has stalled over the past two years or so. Today's consumer price index suggests that 12-month core PCE inflation likely moved up further to 3.3 percent in October, as upward pressures from higher energy prices and AI-related demand continue to flow through to core goods and services prices. Lack of progress on lowering inflation largely reflects a confluence of shocks unrelated to conditions in the labor market. Tariffs, energy, and AI-related price pressures each accounted for roughly one-fourth of above-target core PCE inflation over the 12 months ending in September. The remaining one-fourth likely reflects persistent effects from the inflationary shocks in recent years. Price pressures had been concentrated in a few categories, but the latest data suggest that these pressures may be broadening. It is important to ensure that those inflationary pressures do not intensify, further broaden, or become embedded in consumer and business expectations. But today's consumer price index data suggest that inflation pressures may persist for longer. Tariff effects should further wane going forward. Energy-related price pressures should unwind when the Middle East conflict resolves. And inflation pressures related to the AI buildout seem to persist despite some early signs of slowing. I mostly view these pressures as reflecting relative price shocks in specific sectors of the economy. For example, the AI buildout has quickly shifted investment demand toward specific types of high-tech capital, putting upward pressure on prices due to relatively inelastic supply in the near term. As these shocks wane or unwind and with no inflationary pressures emerging in the labor market, my forecast is for core PCE inflation to move closer to 2 percent next year. Financial Conditions Financial conditions have tightened a bit recently because of lower equity prices, higher private interest rates, and a stronger dollar. That tightening comes against a backdrop of increased market volatility. Corporate bond and mortgage rate spreads have widened, and equity valuations in the tech sector have dropped, as investors appear to be reassessing expected returns and the risks associated with increased external financing for AI investment projects. Economic Outlook and Risks Looking ahead, my expectation is that policies designed to boost the economic potential of the U.S. economy would continue to support productivity, growth, and business confidence. These policies include pragmatic regulations, lower taxes, and more supportive policies toward businesses. I expect the labor market to remain stable and inflation to slow, as special factors currently holding inflation elevated gradually wane or unwind next year. Over time, I also expect increased AI adoption to raise productivity and put some downward pressure on inflation as lower production costs are passed through to consumer prices. On risks to the outlook, with the labor market improving since last year, I am more attentive to the inflation side of our mandate. Sustained supply-chain pressures from the AI buildout or greater pass-through of higher energy costs could cause inflation pressures to persist. I can also envision a scenario in which the effects of the Middle East conflict and the tech investment boom wane or unwind quickly. In this scenario, I would also expect a timelier return of core PCE inflation toward our target. I also see a number of risks to the outlook for economic activity, many originating in financial markets. These risks include a large correction in equity valuations, if returns on AI investment fall short of expectations, and a sharp increase in private longer-term interest rates. Lower equity prices could undermine the resilience in consumer spending. And higher interest rates could further strain interest-rate-sensitive sectors of the economy, like housing and small business investment. I will continue to closely monitor developments in credit and equity markets to assess risks to economic growth and financial stability. Important Issues for Monetary Policy I see conditions in energy markets and the AI buildout as two important issues for the economy in the months ahead. Developments in these two areas could have material effects on both sides of our mandate and could influence my views on the path for monetary policy. Energy Markets The Middle East conflict has disrupted energy markets, impairing the flow of oil and other commodities passing through the Strait of Hormuz, which accounted for about 20 percent of global oil supply before the conflict—roughly equiv