Bowman outlines framework for setting federal funds rate

Vice Chair for Supervision Bowman used a recent Reykjavik Economic Conference address to detail the decision-making framework that guides his votes on the target range for the federal funds rate. The framework is intended to inform every Federal Open Market Committee member as they assess whether to cut, raise, or hold the policy rate.

Bowman said his analysis begins with a broad measure of economic activity, focusing on the recent path and composition of real GDP and, more specifically, private domestic final purchases - the sum of personal consumption expenditures and private fixed investment. He evaluates the unemployment rate and payroll employment, comparing the published rate with his own estimate of its natural level, and looks at average payroll gains over several months to gauge labor-market momentum.

For price stability, Bowman referenced the 2 percent inflation goal set in 2012 and emphasized core PCE inflation - which excludes food and energy - as a more reliable predictor of future total PCE inflation. He also mentioned PCE trimmed-mean inflation as an alternative that filters out outsized price changes and temporary effects such as tariffs.

Bowman highlighted the neutral rate of interest as the benchmark for assessing whether the current policy stance is restrictive, neutral, or accommodative. He argued that when the dual mandate's goals diverge, policymakers should flexibly prioritize the objective that deviates most from its target, rather than favoring one side of the mandate.

The speech underscored that regular contact with businesses, market participants, and other stakeholders provides real-time insight that complements backward-looking data, helping the Committee act promptly to support a strong and stable economy.