Federal Reserve official Michelle Bowman calls for rate cuts as soon as July

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Federal Reserve vice-chair for financial supervision Michelle Bowman has called for a rate cut as soon as July, saying President Donald Trump’s trade war would have a smaller effect on inflation than some economists fear.

Bowman’s remarks on Monday come after Christopher Waller, another Fed governor, said on Friday that the US central bank should consider cutting interest rates as soon as next month — highlighting a divide between central bank officials over how they should respond to Trump’s tariffs. 

Bowman indicated that she would support a cut as soon as next month as recent data had “not shown clear signs of material impacts from tariffs and other policies” and that the inflationary effect of the trade war “may take longer, be more delayed, and have a smaller effect than initially expected”.

“All considered, ongoing progress on trade and tariff negotiations has led to an economic environment that is now demonstrably less risky,” Bowman said. “As we think about the path forward, it is time to consider adjusting the policy rate.” 

The two-year Treasury yield, which is particularly sensitive to interest rate expectations, dropped to session lows following Bowman’s comments. The yield was last down 0.08 percentage points to 3.82 per cent as traders increased their bets on interest rate cuts this year.

Bowman, who took up her role this month after she was nominated by Trump earlier in 2025, also pointed to “signs of fragility in the labour market” and said “we should put more weight on downside risks to our employment mandate going forward”.

“Before our next meeting in July, we will have received one additional month of employment and inflation data,” Bowman said in Prague on Monday.

“If upcoming data show inflation continuing to evolve favourably, with upward pressures remaining limited to goods prices, or if we see signs that softer spending is spilling over into weaker labour market conditions, such developments should be addressed in our policy discussions and reflected in our deliberations,” she said.

The Fed cut interest rates by 1 percentage point last year, but has been on pause since December, with some officials reluctant to cut amid fears that the trade war could stoke another bout of US inflation. 

The Fed’s latest projections, released last week, showed that seven officials think US interest rates will need to remain on hold at 4.25 to 4.5 per cent for the duration of this year to contain stronger price pressures.

But 10 of 19 officials who contribute to the forecasts still think the Fed will be able to make two or more cuts this year. Those in favour of cutting have pointed to tepid inflation data, with price growth in services in particular weakening.

Bowman also discussed the Fed’s plan to kick off an overhaul of US banking regulations by reforming the so-called supplementary leverage ratio, which sets how much high-quality capital banks need to have against their total assets. 

Banks have long been calling on regulators to ease the rule, complaining it punishes them for holding low-risk assets such as US Treasuries and hinders their ability to facilitate trading in the $29tn government debt market.

“The time has come for the federal banking agencies to revisit leverage ratios and their impacts on the Treasury markets,” said Bowman.

The Fed is due to discuss changes to the rule at a meeting on Wednesday, when its board is expected to agree to lower the minimum leverage ratio for the biggest banks from 5 per cent currently to between 3.5 per cent and 4.5 per cent, bringing it in line with international peers.

The US central bank is also planning a conference to discuss broader reform of US bank regulation next month. Bowman said this could bring “many potential improvements” to what she called “distorted capital requirements”. 

Potential changes included adjusting various thresholds and capital rules to take account of economic growth and inflation, she said. This could lower the extra capital buffer required of the eight big US banks considered of global systemic importance.