Tariffs Split Fed Officials on Rate-Cut Outlook
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The emerging divide among Federal Reserve officials over the outlook for interest rates is being driven largely by differing expectations for how tariffs might affect inflation, a record of policymakers’ most recent meeting showed.
“While a few participants noted that tariffs would lead to a one-time increase in prices and would not affect longer-term inflation expectations, most participants noted the risk that tariffs could have more persistent effects on inflation,” the minutes of the Federal Open Market Committee’s June 17-18 meeting said.
New rate projections released following the gathering showed 10 of 19 officials expected at least two rate cuts by year’s end. Seven policymakers, however, projected no cuts at all in 2025, while two projected one cut.
Policymakers pointed to “considerable uncertainty” about the timing, size and duration of the tariffs’ potential effects on inflation, the minutes showed. Depending on how the duties filter through the economy and trade negotiations, officials took varying views on what the inflationary impact might be.
The committee voted unanimously at the meeting to hold rates steady for a fourth consecutive time in a range of 4.25%-4.5%, provoking additional criticism from President Donald Trump, who has repeatedly called for lower borrowing costs.
Tariff Complications
The minutes underscored how a rapidly evolving economic-policy backdrop has complicated the Fed’s policy calculus this year. Trump has expanded the use of tariffs on U.S. trading partners, while forging ahead with policy changes on taxes, immigration and regulation — all of it contributing to economic uncertainty.
“Participants judged that uncertainty about the outlook was elevated amid evolving developments in trade policy, other government policies, and geopolitical risks, but that overall uncertainty had diminished since the previous meeting,” the minutes said.
Most economists expect tariffs to drive up inflation and weigh on economic growth. Fed Chair Jerome Powell has said the central bank probably would have lowered rates further this year if not for tariffs.
But economic data has so far not shown a broad-based impact from the duties, opening a debate among policymakers over when, how much and for how long tariffs will ultimately boost prices.
Policymakers will next look to the release of June consumer price data on July 15.
Patient Approach
Since the June meeting, Fed Governors Christopher Waller and Michelle Bowman have raised the possibility of a rate cut as soon as this month, citing benign inflation data. The minutes showed “a couple” of policymakers said they would be open to considering a rate cut at the Fed’s July 29-30 meeting.
Most policymakers assessed that “some reduction” in the Fed’s policy rate would likely be appropriate this year.
Still, most Fed officials have maintained that an overall stable U.S. economy provides them room to be patient on rate adjustments. Policymakers described economic growth as “solid” and unemployment as “low,” according to the minutes.
“Participants agreed that although uncertainty about inflation and the economic outlook had decreased, it remained appropriate to take a careful approach in adjusting monetary policy,” the minutes said.
Labor-market figures released last week showed pockets of weakness, but reflected stability overall. That likely took some pressure off policymakers for a rate cut at their July meeting.
Fed funds futures contracts suggest investors see rate cuts in September and December.
Policymakers also continued to discuss their periodic review of the central bank’s framework, the strategy document that guides officials’ implementation of monetary policy. The minutes showed they had a preliminary discussion about enhancing the Fed’s communications tools, including possible changes to the quarterly Summary of Economic Projections and “a potential broader use of alternative scenarios.”
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