U.S. Federal Reserve Policy Split

By Howard Schneider and Michael S. Derby

WASHINGTON (Reuters) – The U.S. Federal Reserve is experiencing a close split over whether to continue hedging against inflation risks or to expedite rate cuts. This was evident in the first public comments from policymakers after deciding to maintain steady borrowing costs for now.

Rising tariffs are anticipated to elevate inflation for the remainder of the year. A new Federal Reserve policy report indicated that increased import taxes have already contributed to higher goods inflation, even if overall inflation—including services—has been weaker than expected in recent months.

Fed Governor Christopher Waller stated on Friday that the inflation risk from tariffs is minimal. He advocates for cutting rates at the next meeting in July, citing moderate recent price increases and concerns regarding the job market, particularly high unemployment among recent college graduates.

> “Any tariff inflation … I don’t think is going to be that big and we should just look through it in terms of setting policy,” Waller remarked on CNBC’s Squawk Box. “The data the last few months has been showing that trend inflation is looking pretty good … We could do this as early as July.”

In contrast, Tom Barkin, President of the Richmond Fed, expressed a more cautious viewpoint. He pointed out that with inflation still surpassing the Fed’s 2% target after a lengthy struggle to manage it, unresolved tariff issues, and a low unemployment rate of 4.2%, there’s no immediate need to cut rates.

> “Nothing is burning on either side such that it suggests there’s a rush to act… I’m comfortable with where we are … Core inflation is still over target,” Barkin said.

Meanwhile, Mary Daly, President of the San Francisco Fed, offered a middle-ground perspective. She suggested that a rate cut in the fall would be more suitable than a July move unless there are signs of labor market weakness. Although tariffs could lead to notable inflation, she believes businesses might mitigate their cost increases, which would lessen any inflationary impact.

Daly cautioned against acting preemptively and emphasized the need to monitor incoming data. With evidence showing both inflation and the job market cooling, she remarked, “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.”

Despite the Fed holding its policy rate steady in the 4.25% to 4.5% range since December, the Trump administration claims that the tariffs will ultimately bolster the U.S. economy, with demands for immediate rate cuts.

Recent Fed economic projections predict slower growth alongside higher inflation. Policymakers believe that while tariffs may increase prices, this effect will not be persistent.

There is a clear division among policymakers, with seven advocating for no rate cuts this year and eight suggesting two cuts, which aligns with investor expectations of quarter-point reductions in September and December.

Although none of the three policymakers specified their rate predictions, their remarks revealed an ongoing debate about how significantly President Trump’s efforts to reshape global trade will impact prices, jobs, and growth.

In a previous press conference, Fed Chair Jerome Powell cautioned against overemphasizing any particular forecast, given the volatility of the trade debate and unresolved key decisions. Powell is scheduled to testify in Congress next week regarding monetary policy, amid President Trump’s recent criticisms and concerns about future Fed leadership.

> “For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” Powell told reporters.