Federal Reserve Policymakers Divided on Rate Cuts
The US Federal Reserve is currently torn on whether to cut interest rates due to the risks of inflation and the impact of rising tariffs. The debate came to light on Friday, with the first public comments from policymakers following a decision to hold borrowing costs steady for now. A new Federal Reserve monetary policy report concluded that higher import taxes have already raised inflation for goods.
Concerns About Inflation and Tariffs
Rising tariffs are expected to raise inflation over the rest of the year. However, Fed governor Christopher Waller feels that the inflation risk from tariffs is small and that the Fed should cut rates as soon as its next meeting in July. He believes that recent price increases have been moderate and that there are worrying signs for the job market, such as a high unemployment rate among recent college graduates.
Different Views Among Policymakers
In contrast, Richmond Fed president Tom Barkin takes a more tempered view, arguing that with inflation still above the Fed’s 2% target and the unemployment rate at a low 4.2%, there is no urgency to cut rates. San Francisco Fed president Mary Daly has an in-between view, suggesting that a rate cut in the fall would be "more appropriate" than a July move unless the labor market falters.
The Impact of Tariffs on Inflation
While tariffs could give rise to meaningful inflation, Daly says that businesses may find ways not to pass higher costs on to their customers, tempering any inflation impact. The Fed should not be preemptive and needs to watch where the data goes. However, with data showing both inflation and the job market cooling, "we cannot wait so long that we forget that the fundamentals of the economy are moving in a direction where an interest rate adjustment might be necessary."
The Current State of the Economy
The job market is still solid, but "we are at a point where additional softening could turn into weakening, which I don’t want to see, and we can’t allow for that to happen because we are waiting for inflation to pop up just around the corner." The Fed this week held its policy rate steady in the 4.25 to 4.5% range, where it has been since December.
Projections and Expectations
New Fed economic projections anticipate slower growth and higher inflation. The projections showed policymakers overall still anticipate rate cuts later in the year, a sign they do feel tariffs will raise prices but not in a persistent way. Opinion, however, was closely divided, with seven policymakers seeing zero cuts needed this year and eight anchoring the median at two cuts.
Conclusion
The debate among Federal Reserve policymakers highlights the uncertainty surrounding the impact of tariffs on the economy. While some policymakers believe that the inflation risk from tariffs is small and that rates should be cut, others argue that there is no urgency to cut rates and that the Fed should wait for more data. As the situation continues to unfold, it remains to be seen how the Fed will ultimately respond to the challenges posed by rising tariffs and inflation.
