Fed’s Bowman suggests next policy decisions will look into jobs, economic activity

At a recent U.S. Monetary Policy Forum in 2025, Federal Reserve Governor Michelle W. Bowman provided valuable insights into the impact of monetary policy on the American economy, particularly focusing on the tightening cycle initiated in March 2022. Her address highlighted the intricate relationship between policy decisions and real economic activity.

Bowman acknowledged the forum’s analysis, which meticulously examined the effects of monetary policy shocks on key economic indicators such as Gross Domestic Product (GDP) and employment. The research demonstrated that a one percentage point increase in the federal funds rate leads to sustained negative impacts on both GDP and employment. Notably, sectors like residential investment, business fixed investment, and durable goods consumption were identified as being particularly sensitive to these changes.

A central theme of Bowman’s discussion was the Federal Open Market Committee’s (FOMC) ongoing efforts to bring inflation back to its target of two percent. She explained that higher interest rates work to curb inflation by reducing aggregate demand and dampening real economic activity. While the forum’s analysis focused on GDP and employment, she suggested further examination into the direct impact of these policies on inflation would be beneficial.

Bowman then delved into the FOMC’s aggressive monetary policy tightening, a response to the surge in inflation observed between March 2022 and July 2023. This period saw a cumulative increase of 5.25 percentage points in interest rates. According to average impulse responses, such an increase would typically result in approximately a two percent decline in real GDP and a 1.5 percent reduction in employment levels. The FOMC’s rate hikes, initiated in March 2022, continued throughout the year, with further increases in 2023, culminating in the July 2023 increase.

Despite widespread predictions of a recession in 2022, the U.S. economy displayed resilience in 2023. Contrary to expectations, the economy experienced growth, driven by a resurgence in goods consumption, a partial recovery in residential investment, and increased government spending.

In her concluding remarks, Bowman emphasized the significant shocks and structural changes the U.S. economy has undergone since the pandemic. These changes, she noted, may have influenced or obscured the transmission of monetary policy to real activity. As the FOMC progresses towards its two percent inflation target, she underscored the growing importance of labor market conditions and overall economic activity in future policy deliberations.