For release on delivery
2:00 p.m. EDT (10:00 a.m. AKDT)
August 20, 2024

Remarks on the Economic Outlook and Financial Inclusion

by
Michelle W. Bowman
Member
Board of Governors of the Federal Reserve System
at the

Alaska Bankers Association

Anchorage, Alaska

August 20, 2024

Good morning. It is really a pleasure to join you here in Alaska.'! Getting outside of
Washington, D.C. and hearing about the unique issues that affect Alaskans provides valuable
insights that inform my work at the Federal Reserve. A part of the mission of the Federal
Reserve is to support an economy that works for everyone. Consumers and communities are
more successful when they have access to financial products and services that meet their needs.
While many of these products and services are available online, as Alaskans know better than
most Americans, geography and location are also important. This access often looks very
different in places with many remote and rural communities. Today, I will discuss the Federal
Reserve's work to promote a more inclusive financial system, including our work on financial
inclusion for Indigenous communities. Before diving into those topics, I will share my current
views on the economy and monetary policy.

Economic and Monetary Policy Outlook

Over the past two years, the Federal Open Market Committee (FOMC) has significantly
tightened the stance of monetary policy to address high inflation. At our July meeting, the
FOMC voted to continue to hold the federal funds rate target range at 5/4 to 5'4 percent and to
continue to reduce the Federal Reserve's securities holdings.

After seeing considerable progress last year, in recent months we have seen some further
progress on lowering inflation. The 12-month measures of total and core personal consumption
expenditures (PCE) inflation, which I prefer to the more volatile higher-frequency readings, have
moved down since April, although they have remained somewhat elevated at 2.5 percent and 2.6

percent in June, respectively. In addition, the latest consumer and producer price index reports

' The views expressed here are my own and not necessarily those of my colleagues on the Federal Open Market
Committee or the Board of Governors.

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indicate that 12-month core PCE inflation likely remained a bit above 2.5 percent in July. The
progress in lowering inflation since April is a welcome development, but inflation is still
uncomfortably above the Committee's 2 percent goal.

Prices continue to be much higher than before the pandemic, which continues to weigh
on consumer sentiment. Inflation has hit lower-income households hardest, since food, energy,
and housing services price increases far outpaced overall inflation over the past few years.

Economic activity moderated in the first half of this year after increasing at a strong pace
last year. Private domestic final purchases (PDFP) growth was solid and slowed much less than
gross domestic product (GDP), as the slowdown in GDP growth was partly driven by volatile
categories such as net exports, suggesting that underlying economic growth was stronger than
GDP indicated. Unusually strong consumer goods spending last year softened in the first quarter
of this year, largely accounting for the step-down in PDFP growth. Goods spending rebounded
in the second quarter and retail sales continued to rise at a solid pace in July.

Consumers appear to be pulling back on discretionary items and expenses, as evidenced
in part by a decline in restaurant spending since late last year. Low- and moderate-income
consumers no longer have savings to support this type of spending, and we've seen a
normalization of loan delinquency rates as they have risen from historically low levels during the
pandemic.

The labor market continues to loosen, as the number of available workers has increased
and the number of available jobs has declined-signs that illustrate the labor market is coming
into better balance. After slowing in the second quarter, payroll employment gains eased to a
more modest pace in July, even as job openings are being filled by the increased immigrant labor

supply. The latest labor market report shows that the unemployment rate stood at 4.3 percent in

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July. Although notably higher than a year ago, this is still a historically low unemployment rate.
In addition, the ratio of job vacancies to unemployed workers has declined to its pre-pandemic
level. We are also seeing a slowing in wage growth, which now stands at just under 4 percent as
measured by the employment cost index. However, given trend productivity, wage gains remain
above the pace consistent with our inflation goal.

My baseline outlook is that inflation will decline further with the current stance of
monetary policy. Should the incoming data continue to show that inflation is moving sustainably
toward our 2 percent goal, it will become appropriate to gradually lower the federal funds rate to
prevent monetary policy from becoming overly restrictive on economic activity and
employment. But we need to be patient and avoid undermining continued progress on lowering
inflation by overreacting to any single data point. Instead, we must view the data in their totality
as the risks to the Committee's employment and price-stability mandates continue to move into
better balance. That said, I still see some upside risks to inflation as supply conditions have now
largely normalized and any further improvements to supply seem less likely to offset price
pressures arising from increasing geopolitical tensions, additional fiscal stimulus, and increased
demand for housing due to immigration.

There are also risks that the labor market has not been as strong as the payroll data have
been indicating, and it appears that the recent rise in unemployment may be exaggerating the
degree of cooling in labor markets. The Q4 Quarterly Census of Employment and Wages
(QCEW) report suggests that job gains have been consistently overstated in the establishment

survey since March of last year, while the household survey unemployment data have become

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less accurate as response rates have appreciably declined since the pandemic." The rise in the
unemployment rate this year largely reflects weaker hiring, as job searchers entering the labor
force are taking longer to find work, and layoffs remain low. It is also likely that some
temporary factors contributed to the soft July employment report. The rise in the unemployment
rate in July was largely accounted for by workers who are experiencing a temporary layoff and
are more likely to be rehired in coming months. Hurricane Beryl also likely contributed to
weaker job gains, as the number of workers not working due to bad weather increased
significantly last month.

In light of upside risks to inflation and uncertainty regarding labor market conditions and
the economic outlook, I will continue to watch the data closely as I assess the appropriate path of
monetary policy. Increased measurement challenges and the frequency and extent of data
revisions over the past few years make the task of assessing the current state of the economy and
predicting how it will evolve even more challenging. I will remain cautious in my approach to
considering adjustments to the current stance of policy.

It is important to note that monetary policy is not on a preset course. In my view, we
should consider a range of possible scenarios that could unfold when assessing how the FOMC's
monetary policy decisions may evolve. My colleagues and I will make our decisions at each
FOMC meeting based on the incoming data and the implications for and risks to the outlook and
guided by the Fed's dual-mandate goals of maximum employment and stable prices. By the time

of our September meeting, we will have seen additional economic data and information,

2 The Q4 Quarterly Census of Employment and Wages (QCEW) administrative data show employment gains that
are about 110,000 per month lower than what the Current Employment Statistics (CES) survey reported from March
2023 to December 2023. Although the Bureau of Labor Statistics benchmarks CES payroll employment based on
the Ql QCEW,, to be released on August 21, the Q4 QCEW data point to a substantial downward revision to CES
employment gains last year.

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including one employment and one inflation report. We will also monitor how developments in
broader financial conditions might influence the economic outlook.

I will continue to closely watch the data and visit with a broad range of contacts as I
assess economic conditions and the appropriateness of our monetary policy stance. As I noted
earlier, I continue to view inflation as somewhat elevated. And with some upside risks to
inflation, I still see the need to pay close attention to the price-stability side of our mandate while
watching for risks of a material weakening in the labor market. My view continues to be that
restoring price stability is essential for achieving maximum employment over the longer run.
Focus on Financial Inclusion

I will turn now to discuss our work to promote financial inclusion. An inclusive financial
system enables access to financial services that enhance the financial well-being of consumers
and businesses. Consumers come from a wide range of economic circumstances, with varied
perceptions of and experiences with the banking system and different financial needs. All
consumers should have access to the financial services and products they need.

The U.S. economy benefits when more households achieve financial stability. Yet, while
we have made significant progress in expanding access to financial services and deposit accounts
in the United States, the remaining challenges often include geographic location, products that
meet specific customer needs, the absence of financial literacy education, lack of access to
technology and reliable internet, and in some cases, language. These challenges are even more
acute in providing access to financial services to Indigenous populations like those here in
Alaska. It is impressive to see that many financial services providers, including banks and
Community Development Financial Institutions (CDFIs), are working to address these

challenges and making significant inroads.

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Importance of banks in furthering financial inclusion

The U.S. financial system is uniquely positioned to bring consumers into the financial
mainstream by providing innovative solutions to meet the credit needs of their communities.
Banks and other depository institutions assist consumers and small businesses by providing
financial products and services that are safe, fair, and responsive. In doing so, they serve a
critical role in connecting consumers to the financial system and to the economy.

Smaller banks, including community banks, are indispensable in providing access to
financial products and services, especially in more remote or rural areas. Here, in Alaska, your
banks are the front-line providers for your communities. As you know well, community banks
support small businesses through credit and technical assistance and targeted support specific to
customers in their communities. As a former community banker, I know firsthand that smaller
banks deeply understand their communities because they live in the local economy and know
their customers well.

This was especially apparent during the COVID pandemic. Community banks rose to the
challenge and continued to support the needs of their customers and communities. One of the
programs first made available in response to the pandemic was the Paycheck Protection Program
(PPP), which was geared to small businesses and was necessarily dependent on community

banks. The PPP was timely and effective in helping millions of businesses weather the initial

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phase of the pandemic, and community banks were absolutely essential to the success of the
program.'

This successful outcome is probably not surprising to this audience, because when it
comes to lending to small businesses, community banks have always been an outsized source of
credit, relative to their size in the banking system. Before the pandemic, community banks
accounted for over 40 percent of all small business lending, while they only accounted for
roughly 15 percent of total assets in the banking system.* This trend has continued. An analysis
of June 2023 call report data showed that community banks had larger shares of small-business
loans relative to their total assets than larger institutions.°

Community banks know their customers, and they know their communities. During that
challenging time, community bank CEOs told me that early in the pandemic they directly
contacted every single one of their business and consumer loan customers. They took the time to
check in with each one to see how they were doing, and what they needed. They encouraged
customers to keep in touch with the bank, and they noted the available opportunities for payment

deferrals and other options that customers might not have been aware of. Because of this

3 Allen N. Berger, Maryann P. Feldman, W. Scott Langford, and Raluca A. Roman, "Let Us Put Our Moneys
Together: Minority-Owned Banks and Resilience to Crises," WP-2313 (Federal Reserve Bank of Philadelphia, June
2023), https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2023/wp23-13.pdf.

4 Governor Michelle W. Bowman, "Community Banks Rise to the Challenge" (speech at the Community Banking
in the 21st Century Research Conference, St. Louis, MO, September 30, 2020),
https://www.federalreserve.gov/newsevents/speech/bowman20200930a.htm

5 See Eldar Beiseitov, "Small Banks, Big Impact: Community Banks and Their Role in Small Business Lending,"
October 20, 2023, https://www.stlouisfed.org/publications/regional-economist/2023/oct/small-banks-big-impact-
community-banks-small-business-lending.


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relationship banking model, small banks were and continue to be able to provide more tailored
financial products and services that are designed to meet the specific needs of their customers.°

We all recognize the important role of small banks in the functioning of the U.S.
economy by supporting the financial needs of their customers and communities. The Federal
Reserve relies on insights from community banks and created a mechanism to formalize the
views and feedback from community banks on a regular basis through our Reserve Bank and
Board Community Depository Institutions Advisory Councils (CDIAC). The Board CDIAC
includes a representative from each of the local advisory councils at the 12 Reserve Banks.
CDIAC members are bankers from community banks, thrifts, and credit unions who provide
insight and information about the economy, lending conditions, and other issues that they see
firsthand in their communities.

This perspective helps us gain insights into economic activity and the impact of our
policies on rural and underserved communities.
Central Bank Network for Indigenous Inclusion

I will turn now to highlight our efforts in providing broader access to financial services.
In 2021, the Federal Reserve became a member of the Central Bank Network for Indigenous
Inclusion (CBNII).' This group brings together the central banks of the United States, Canada,
New Zealand, and Australia. The network enabled us to initiate an ongoing international

dialogue to raise awareness of economic and financial issues in Indigenous populations. This

® Governor Michelle W. Bowman, "The Role of Research, Data, and Analysis in Banking Reforms" (speech at the
2023 Community Banking Research Conference, St. Louis, MO, October 4, 2023),
https://www.federalreserve.gov/newsevents/speech/bowman20231004a.htm

7 Board of Governors of the Federal Reserve System, "Federal Reserve Board Announces It Has Joined the Central
Bank Network for Indigenous Inclusion, Which Will Foster Ongoing Dialogue, Research, and Education to Raise
Awareness of Economic and Financial Issues and Opportunities around Indigenous Economies," news release,
October 13, 2021, https://www.federalreserve.gov/newsevents/pressreleases/other20211013a.htm


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allows us to share knowledge and best practices, promote engagement and education, and work
together with Indigenous communities.

As the Federal Reserve's representative to the network, I have prioritized expanding our
outreach and engagement efforts to include all U.S. Native populations, Native Alaskan, Native
Hawaiian, and Native American. Coming here to Alaska is a key part of this role to ensure that
the Federal Reserve continues to expand our firsthand knowledge and understanding of the
issues and barriers that may prevent full engagement in the economy. I take these
responsibilities seriously and have made meeting with and learning from Indigenous groups and
leaders a priority in my work.

In October 2021, I met with Native American leaders in South Dakota and on the Pine
Ridge Reservation. These tribal leaders highlighted the importance of building understanding by
meeting with people in their communities to enhance our knowledge of their social and
economic circumstances. Earlier this year and last year, I met with members of the Native
Hawaiian community and a range of community organizations to learn about the issues and
challenges they face, in addition to the recovery efforts following the devastating wildfire in
Lahaina. And yesterday, I met with Native Alaskan leaders to learn about Alaska Native
corporations and other initiatives here in Alaska. These convenings and conversations help to
inform our work at the Federal Reserve to ensure that the financial system is accessible to
everyone, including Indigenous communities.

The Fed's work in this area is supported by many of our Reserve Bank teams, including
the San Francisco Reserve Bank, the Minneapolis Center for Indian Country Development, and
the St. Louis Native Economic and Financial Education Empowerment program. Together, these

teams and programs support Indigenous organizations and tribal nations by providing actionable

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data and research, economic and personal finance education, and other resources to advance
opportunities for prosperity in Indigenous communities.

We know that the economic well-being of all Americans is an important aspect of the
Federal Reserve's goal to increase economic inclusion, and it is one of the reasons we began
participating in the CBNII. Even with all of its tools, the Federal Reserve cannot fully succeed
until all Americans, including our Native populations and those existing on the margins of the
economy, have the opportunity to fully participate. Engagement in these learning opportunities,
including these meetings, will help to advance this goal.

Mission-driven organizations

Finally, I would like to briefly address the Federal Reserve's efforts to build the
institutional capacity of another set of key stakeholders: Minority Depository Institutions,
Women-Owned Depository Institutions, and CDFIs, whose missions are to reach historically
underserved populations. Providing support for these institutions is an important part of the
Federal Reserve's responsibility to provide a safe, sound, and accessible banking system that
protects consumers.*®

These mission-driven banks and CDFIs are often vital sources of capital to many
underrepresented small businesses. CDFIs generally target specific underserved markets. For
example, there are many Native CDFIs, including several here in Alaska, that support Native
communities by providing access to credit, capital, and financial services.? While there has been
some significant growth in Native CDFIs,'° they cannot singlehandedly resolve the credit needs

of this population. This effort will require partnerships with banks, state and local governments,

8 See the Federal Reserve's Partnership for Progress website at https://www.fedpartnership.gov.

> See https://Avww.cdfifund.gov/programs-training/programs/native-initiatives.

10 See https://www.minneapolisfed.org/article/2024/native-cdfis-connect-indian-country-to-credit-and-capital.


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and community stakeholders. As an example, the Federal Reserve convened a small business
lending working group that brought together local, state, and federal partners to address
challenges with access to capital for Alaskan small businesses, especially those owned by Native
Alaskans.!! This group has helped connect local Native CDFIs to banks and state and federal
partners for funding and technical assistance.

Finally, I will close with a brief note on the revisions to the CDFI Certification
Application recently released by the Treasury's CDFI Fund." There are significant benefits to
being a certified CDFI, including access to federal, state, and local governmental funds,
philanthropic support, and private sector investment. While the certification process is overseen
by the CDFI Fund, I encourage CDFI banks to review the new certification application and share
feedback on whether the requirements are attainable and remain compatible with the bank's
existing business model.

Closing Thoughts

In closing, thank you again for welcoming me here today. I am very pleased to have the
opportunity to learn from your experiences and incorporate these lessons into our work. The
unique challenges that you face here in Alaska will help to inform and expand the Federal
Reserve's understanding of how we can make the financial system more inclusive. Our meetings
over the past few days with state government officials, Native Alaskan leaders, small business
owners, and financial institutions provide many different perspectives to help inform our work to

achieve an economy that works for everyone.

'l Governor Michelle W. Bowman, panel remarks at the 2023 Symposium on Indigenous Inclusion, Te Piitea
Matua, Auckland, New Zealand, September 27, 2023,
https://www.federalreserve.gov/newsevents/speech/bowman20230927a.htm,

2 See https://www.cdfifund.gov/news/553.