NEW YORK (Reuters) -Federal Reserve Vice Chair for Supervision Michelle Bowman reiterated on Friday that she believes decisive interest rate cuts are needed to ward off rising trouble in the job market.

"Recent data show a materially more fragile labor market along with inflation that, excluding tariffs, has continued to hover not far above our target," Bowman said in the text of a speech delivered before a gathering of the Forecasters Club of New York.

Citing many months' worth of data showing mounting issues in the job market, Bowman said it is time for the rate-setting Federal Open Market Committee "to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility."

She said "we are at serious risk of already being behind the curve in addressing deteriorating labor market conditions," and noted "should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward."

When the rate-setting Federal Open Market Committee met last month policymakers trimmed their overnight interest rate target range by a quarter of a percentage point to between 4% and 4.25%. While officials are still worried about inflation being above their target, their rate cut was aimed at helping bolster the job market.

One Fed governor voted in favor of a larger rate cut but Bowman joined with her colleagues to support the 25-basis point easing. Bowman had dissented at the Fed's meeting at the end of July in favor of a rate cut while most officials then favored keeping rates steady.

In her speech, Bowman brushed off fears that President Donald Trump's trade tariffs are on track to create a persistent inflation problem. She said when tariffs are taken out of the equation, price pressures have "continued to hover not far above our target."

And although inflation is still over the 2% target, Fed policy should "focus on the side of the mandate that is showing signs of deterioration or fragility," which means acting to support the job market, the official said.

BALANCE SHEET DRAWDOWN

Bowman also took on the state of the Fed's ongoing contraction of its bond holdings and said "my preference is to maintain the smallest balance sheet possible with reserve balances at a level closer to scarce than ample."

Shrinking the balance sheet as much as possible now gives the Fed flexibility to respond to future troubles if needed, the official said. Bowman also said she'd like an all-Treasury balance sheet tilted toward shorter-dated holdings, and noted the Fed could rejigger its holdings toward longer-dated bonds if needed without increasing the overall size of its holdings.

Bowman also said she was willing to go beyond the passive balance sheet runoff the Fed is currently using to reduce its holdings. "I also look forward to revisiting the committee's consideration of potential sales of our agency MBS holdings," Bowman said. "Simply relying on MBS runoff will not allow returning to a Treasury-only portfolio within a credible time frame."

Selling mortgage-backed securities could potentially be problematic for the Fed, as it would be unloading supply into a housing-related market already under stress, amid high rates. Selling that class of securities could make home borrowing more expensive if it was done aggressively. 

Bowman also addressed Fed liquidity facilities in her remarks and expressed interest in changes to the Standing Repo Facility, or SRF, a new and largely untested tool the Fed created in 2021 to provide a shock absorber for markets when liquidity ran short. The SRF is expected to see major usage next week when market participants manage liquidity needs over the quarter-end.

"My preference would be for a minimum bid rate higher than the top of the federal funds rate target range in order to emphasize that the SRF's purpose is to serve only as a backstop," rather than a normal source of funding, Bowman said.

"A rate above the top of the target range would be more likely to discourage use of the facility outside of exceptional market-wide episodes of acute stress."