Federal Reserve Vice Chair for Supervision Michelle Bowman warned the current approach to leverage ratio requirements has led to unintended consequences in the market while adding she could support lowering interest rates as soon as July.
Bowman said the “time has come” to revisit the key capital buffer after concerns the rule has constrained lenders’ trading in the $29 trillion Treasuries market.
“Leverage ratio impacts on bank-affiliated broker-dealers can have broader impacts, including market impacts like those observed in Treasury market intermediation activities,” Bowman on Monday said in prepared remarks for a research conference in Prague. “Once we’ve identified emerging unintended consequences — issues that were not contemplated during the development of a regulatory approach, we must consider how to revisit earlier regulatory and policy decisions.”
Bowman outlined an ambitious agenda earlier this month — from reviewing a capital buffer known as the supplementary leverage ratio to insulating community banks from requirements targeting bigger firms.
The Fed and other regulators this week are set to unveil potential changes to leverage rules in a proposal that would change the overall ratio instead of excluding specific assets like Treasuries as some observers had predicted, Bloomberg News reported earlier.
Bowman said the Fed will host a July 22 conference to to discuss bank capital and noted “simple reforms” could improve Treasury market functioning by building resilience in case of stress events. She previously criticized regulators’ plan to require the country’s largest lenders to hold significantly more capital to buffer against losses and a potential financial crisis.
Bowman is widely expected to support dramatically easing the requirements of that proposal, known as Basel III endgame. The original plan, unveiled in 2023, would have hiked the biggest banks’ capital requirements by 19%. The Fed later walked it back after industry opposition.
Monetary Policy
In her remarks on the economy and monetary policy, Bowman said she would support lowering interest rates as soon as July and that, in her view, risks to the labor market could rise, while inflation appears to be on a sustained path toward the Fed’s 2% objective.
“Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market,” Bowman said.
The Fed at its meeting last week held its benchmark interest rate in a range of 4.25% to 4.5%, a level that is widely considered above a neutral position that would neither inhibit nor promote economic activity. Bowman said she supported that decision.
Following the meeting, Fed Chair Jerome Powell reiterated his view that policymakers can afford to take a patient approach on rate adjustments, as they wait for additional details on how President Donald Trump’s economic policies, particularly on trade, evolve.
Still, the Trump administration’s expanded use of tariffs has yet to show up in economic data, with figures on both the labor market and inflation holding up well. Bowman said “the data have not shown clear signs of material impacts from tariffs and other policies.”
“I think it is likely that the impact of tariffs on inflation may take longer, be more delayed, and have a smaller effect than initially expected, especially because many firms front-loaded their stocks of inventories,” she said.
She added that “ongoing progress on trade and tariff negotiations has led to an economic environment that is now demonstrably less risky.”
The Fed is charged with maintaining stable prices and maximum employment. Bowman said downside risks to the central bank’s employment goal “could soon become more salient, given recent softness in spending and signs of fragility in the labor market.”
“In my view, it was appropriate to recognize that the balance of risks has shifted,” she said.
“As we think about the path forward, it is time to consider adjusting the policy rate,” Bowman noted, adding that changes to trade policy will likely result in “only minimal impacts” on the Fed’s preferred inflation gauge.
The Fed next meets July 29-30.
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