Federal Reserve Vice Chair for Supervision Michelle W. Bowman said the U.S. economy enters the final stretch of 2026 with strengthening growth and a stabilizing labor market, but cautioned that inflation pressures have persisted longer than she had hoped and have recently shown signs of broadening — leaving the reduction of inflation as her foremost policy priority.

Bowman laid out her outlook for the U.S. economy and her considerations for monetary policy in remarks delivered November 10, 2026, at the C. Peter McColough Series on International Economics at the Council on Foreign Relations in Washington, D.C. She presented identical remarks at a subsequent event held by Unleash Prosperity Now on the same day. As Vice Chair for Supervision, Bowman serves as the Fed's senior banking regulator, and she is one of the 12 voting members of the rate-setting FOMC, giving her a direct vote on the committee's rate decisions.

"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," Bowman said, adding that these outcomes suggest the policy rate cuts toward the end of last year helped address some labor market weakness. At the same time, she noted, the United States is experiencing rapid technological change and ongoing geopolitical tensions. Increased investment in and use of artificial intelligence (AI) — or "super intelligence" — are boosting economic growth and productivity, and American families appear resilient.

Bowman framed the tension at the heart of the Federal Reserve's dual mandate directly: while the labor market has improved more than she expected this year, progress on lowering inflation has disappointed. "Therefore, bringing inflation down remains a priority," she said. She is also monitoring expectations about AI and energy prices and how they influence the risks to achieving the Fed's mandates. Consistent with her views following the September FOMC meeting, she continues to focus on interpreting underlying trends in the economy and the evolution of financial conditions.

Holding at 3-3/4 to 4 Percent

At the Federal Open Market Committee's most recent meeting in October, Bowman joined her colleagues in supporting the decision to hold the federal funds rate target range at 3-3/4 to 4 percent. The federal funds rate is the central bank's primary policy lever, setting the baseline for borrowing costs on everything from mortgages to business loans. The approach, she said, was consistent with her view that further changes in the policy rate should wait until policymakers 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 in October allowed the committee to assess incoming data, Bowman said. While she continues to expect several of the factors currently boosting inflation to abate next year, inflation has proven more persistent than she anticipated. It is also important, she added, to gain greater clarity on the effect of recent market volatility on financial conditions.

Growth Accelerating on AI Investment and Consumer Spending

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 likely increased at an even stronger pace of more than 3 percent in the third quarter — well above last year's 2 percent pace. Bowman said growth has been supported by robust increases in AI-related capital expenditures and solid consumer spending.

Not all sectors have shared in the expansion: some interest-rate-sensitive sectors, such as 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 she attributed in part to higher energy prices.

A Stable but Unusually Static Labor Market

Labor market conditions look to have improved since last year. The unemployment rate has edged down over the course of the year to 4.1 percent in October, remaining close to Bowman's 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, however, with low-hiring and low-firing conditions of the kind sometimes seen 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, Bowman said, those data would be consistent with a higher unemployment rate than currently reported — but 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," she observed.

Although stable, the labor market does not appear tight. 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, with both measures slowing noticeably from a year earlier. An increasing number of workers have taken on supplemental part-time jobs to make ends meet, with the share of multiple job holders rising back to levels seen in early 2025.

Bowman noted that given strong productivity gains in recent years, wage growth at this pace is in line with — or even below — the pace one would expect if inflation were running at 2 percent.

Inflation: Two Years of Stalled Progress

Progress on lowering inflation has stalled over the past two years or so, Bowman said. Citing the consumer price index data released alongside her remarks, she indicated that 12-month core PCE inflation — the Fed's preferred inflation gauge, which strips out volatile food and energy prices — 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.

In her assessment, the lack of progress 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, with the remaining one-fourth likely reflecting persistent effects from the inflationary shocks of recent years. Price pressures had been concentrated in a few categories, but the latest data suggest those pressures may be broadening.

Bowman stressed the importance of ensuring that inflationary pressures do not intensify, broaden further, or become embedded in consumer and business expectations. But the day's consumer price index data suggest inflation pressures may persist for longer. In her framework, tariff effects should continue to 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.

She said she mostly views these pressures as relative price shocks in specific sectors of the economy. The AI buildout, for example, has quickly shifted investment demand toward specific types of high-tech capital, putting upward pressure on prices because supply is relatively inelastic in the near term. As these shocks wane or unwind — and with no inflationary pressures emerging in the labor market — Bowman's forecast is for core PCE inflation to move closer to 2 percent next year.

Financial Conditions Tightening Amid Volatility

Financial conditions have tightened a bit recently, Bowman said, 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.

Outlook: Supportive Policies, But Risks Cluster in Markets

Looking ahead, Bowman said she expects policies designed to boost the economic potential of the United States — pragmatic regulations, lower taxes, and more supportive policies toward businesses — to continue supporting productivity, growth, and business confidence. She expects the labor market to remain stable and inflation to slow as the special factors currently holding inflation elevated gradually wane or unwind next year. Over time, she also expects increased AI adoption to raise productivity and put some downward pressure on inflation as lower production costs are passed through to consumer prices.

On the risks to the outlook, Bowman said that with the labor market improving since last year, she is more attentive to the inflation side of the Fed's mandate. Sustained supply-chain pressures from the AI buildout or greater pass-through of higher energy costs could cause inflation pressures to persist. She can also envision a scenario in which the effects of the Middle East conflict and the tech investment boom wane or unwind quickly — in which case she would expect a timelier return of core PCE inflation toward the target.

She also sees a number of risks to the outlook for economic activity, many originating in financial markets. These 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, such as housing and small business investment. Bowman said she will continue to closely monitor developments in credit and equity markets to assess risks to economic growth and financial stability.

Two Issues to Watch: Energy and AI

Bowman identified conditions in energy markets and the AI buildout as two important issues for the economy in the months ahead, saying developments in both areas could have material effects on both sides of the Fed's mandate and could influence her views on the appropriate 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 equivalent to total U.S. oil consumption. As tensions rose, Brent oil prices moved up to and above $110 per barrel in the second half of October before dropping sharply last week on optimism that an agreement between the United States and Iran could be reached following the midterm elections.

Although crude oil flows in the Persian Gulf have recovered to near pre-conflict levels in recent weeks, freight rates and insurance premiums have surged because of more complex logistics and ongoing geopolitical risk, raising the cost of delivered oil to many markets around the world. Prices for gasoline, diesel, and jet fuel also moved up to near — or even above — their highs in the spring, reflecting both higher crude oil prices and wider refining margins, as refineries in both the Persian Gulf and Russia have been damaged as a result of ongoing military conflicts in the two regions. Prices for refined products have retraced some of the earlier gains more recently as crude oil prices have receded and margins have shown signs of normalizing.

While the outcomes of these conflicts remain uncertain, Bowman said her approach is to look through temporary energy-driven inflation when possible, and to remain alert to signs that it is spreading into broader prices or expectations. If geopolitical tensions persist, energy prices may stay elevated in the near term, increasing the risk that core inflation also stays elevated because of increased pass-through to consumer prices of higher production and transportation costs.

Although the U.S. economy is now a net exporter of oil products and less energy intensive, Bowman said the country could still see an impact on economic activity from higher energy prices. The recent deterioration in consumer sentiment measures suggests households may be internalizing a more persistent reduction in their purchasing power. She would be especially concerned about effects on both sides of the mandate if there were further significant disruptions to energy markets, and an escalation of geopolitical tensions could have more meaningful effects on real activity because of higher uncertainty and the larger impact of energy prices on lower- and middle-income consumers.

Even with a quick resolution to the Middle East conflict, it may take some time for energy prices to normalize. Futures markets expect oil prices to decline only gradually, as global oil consumption is projected to exceed supply at least through the end of this year. As inventories have been drawn down, the U.S. Strategic Petroleum Reserve, the nation's emergency crude oil stockpile, has reached a bit less than 50 days of crude oil imports — the lowest level since the early 1980s — reflecting both this year's releases and the larger 2022 releases. A number of new Gulf pipelines to bypass the Strait of Hormuz are under construction or expansion, with the United Arab Emirates' West–East expansion coming online in early 2027 and most others in 2028 and beyond. Domestic oil production could also continue to rise, which would put downward pressure on fuel costs.

The AI Buildout

Having discussed the responsible use of AI in the financial system in remarks earlier this year, Bowman turned to how the technology is shaping the broader economy. Given its transformative promise, investment in data centers has boomed and has been a major influence on the U.S. economy. With plans for new data centers continuing to surge, she expects the AI shock to play out over some time. However, as these investments are increasingly financed with external funds — including off-balance-sheet liabilities — she is focused on potential risks to the economy and financial stability if revenues from AI customers disappoint.

The economy may still be in the early days, Bowman suggested, with investment rising rapidly while workers and firms determine the best use cases before more meaningful effects on productivity appear. The boom in data center investment is undeniable: growth in real business fixed investment has strengthened further this year to a pace like the 1990s tech boom. High-tech equipment, software, and data center construction have accounted for the large majority of growth in business investment since 2025, with gains broadening to other categories this year.

AI adoption has grown significantly, especially among larger firms: about 25 percent of businesses and roughly 10 percent of workers report using AI every day in their work. Use varies greatly across industries and occupations, with stronger adoption in information and other business services sectors. Bowman said she sees a risk that some workers will be displaced as firms adopt the technology, even as others see their productivity — and wages — rise. Monetary policy cannot address that transition directly, she said, but it should support a dynamic labor market that facilitates the necessary retraining and mobility of workers across jobs.

AI revenues have been rising quickly but are not yet sufficient to pay for the expense of maintaining existing and developing new AI models and data centers. As capital spending has surged, hyperscalers — the largest cloud-computing providers — and other companies have increasingly been sourcing funds from credit and equity markets, and the cost of financing has been rising notably as investors see increased risk in these investments.

In addition to financing costs, the AI buildout is putting upward pressure on a number of price categories. Prices of memory chips, semiconductors, computers, and other electronic products have increased sharply this year — in a few categories by double digits — as demand from data centers has outpaced supply. Bowman expects production capacity to catch up to demand gradually over time.

AI-related debt has been rising rapidly, with notable gains in corporate bonds, private credit, and project finance, and is on track to exceed $800 billion this year. Other obligations — in the form of long-term lease and contract commitments and residual value guarantees — have also surged, and their potential payments are estimated at more than three times the amount of the debt. Given their strong credit ratings, hyperscalers and large tech firms have assumed off-balance-sheet liabilities that allow smaller and riskier companies to use them as collateral in asset-based financing for data center construction and the purchase of accelerated computing equipment. Bowman noted that these connections among AI firms have also been accompanied by hyperscalers and chip designers making equity investments in smaller companies that purchase their products — creating the appearance of circular financing.

On the financial system's exposure, Bowman said the largest U.S. bank holding companies have some exposure to AI-related financing, which is scrutinized during annual supervisory stress tests. Life insurance companies, pension funds, private credit, and mutual funds also have exposure. Most of these entities are well capitalized and have stable funding, but the complex nature of the financing structures makes it difficult to properly assess counterparty risk.

Risks seem to be concentrated in only a few large firms that provide AI services, including AI labs and the hyperscalers. If AI-related revenues fall short of sharply rising costs — especially as public sentiment and local opposition could lead to increased regulation and delays — the result could be a sharp correction in equity prices for AI firms, higher financing costs, and reduced access to credit. Such a shock would likely slow the AI buildout and soften both economic activity and inflation.

Some reassessment of expected returns may already have played out in recent weeks, Bowman observed, as equity valuations dropped, corporate bond spreads widened, and credit default swaps increased for some companies involved in the AI buildout. She said she will be looking at how momentum in adoption of and investment in the technology evolves, and at possible effects on both inflation and employment.

The Path Forward for Monetary Policy

As policymakers consider the path ahead, Bowman said it is important to remember that over the past two years the U.S. economy has experienced successive inflationary shocks that have not been driven by labor market conditions. Monetary policy cannot offset the direct effects of tariffs and energy costs on inflation, but it plays a central role in containing second-round effects. Monetary policy also has limited influence on AI-related price pressures — though in certain segments of AI-intensive sectors, particularly among newer and medium-sized firms, higher interest rates appear to be holding back investment and purchasing decisions.

With financial conditions having tightened, Bowman said the benefit of additional policy tightening has to be carefully weighed against its costs for interest-rate-sensitive sectors. The October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) suggests the concentration of demand weakness in real estate loan categories reflects existing headwinds in those sectors.

Time, she said, will help policymakers learn more about the durability of momentum in AI-related demand and the evolution of geopolitical risks — both of which could be critical in the months ahead for setting the policy stance. Greater clarity on AI-related financing conditions and the sustainability of AI investments should increase her confidence in future policy decisions. Geopolitical conditions affect commodity markets and the degree of economic uncertainty perceived by households and businesses.

Before the FOMC's next meeting in December, the committee will receive the PCE inflation report for October and the employment report for November. Bowman said she is seeing signs that inflation pressures are persisting while labor market conditions appear to be firming — an indication that "there is still work to do to bring inflation closer to 2 percent." Given the recent market volatility, she will also continue to closely monitor how developments in financial conditions influence the economic outlook, and she will continue to meet with a broad range of contacts to inform her assessment of economic conditions and the appropriate stance of policy.

"It is important to remember that monetary policy is not on a preset course," Bowman said. At each FOMC meeting, she and her colleagues will evaluate incoming data, the evolving outlook, and the implications for the risks to the dual-mandate goals of maximum employment and price stability.

The full text of the speech is available on the Federal Reserve Board's website at https://www.federalreserve.gov/newsevents/speech/bowman20261110a.htm

Notes

• Bowman noted that the views expressed are her own and are not necessarily those of her colleagues on the Federal Open Market Committee (FOMC) or the Board of Governors of the Federal Reserve System.
• She referenced Atlantic Council (2026), "Federal Reserve Vice Chair Michelle Bowman on Modernizing Financial Regulation," AC Front Page event, Washington, October 1.
• She cautioned that currently reported GDP growth in the first half of this year may be overestimated by about 0.3 percentage point, reflecting downward revisions in the retail sales annual update that were not folded into the Bureau of Economic Analysis (BEA) 2026 annual revision of the national accounts.
• Her earlier remarks: Michelle W. Bowman (2026), "Artificial Intelligence in the Financial System," delivered at the Financial Stability Oversight Council Artificial Intelligence Series Roundtable on Cybersecurity and Risk Management, Washington, May 1.
• The October 2026 SLOOS is available on the Board's website at https://www.federalreserve.gov/data/sloos/sloos-202610.htm