A rate cut debate is heating up inside the Fed

Key Points

Federal Reserve Divide: A split exists within the Federal Reserve on whether to maintain current interest rates or consider cuts later this year, influenced by potential inflation from President Trump's tariffs.**
Temporary vs. Persistent Inflation: Some policymakers, including Fed Governor Chris Waller, believe tariff-induced inflation will be temporary and advocate for "looking through" these effects, while others, like Minneapolis Fed President Neel Kashkari, worry about persistent inflation and favor holding rates steady.**
Waller’s Optimism: Waller supports potential rate cuts later in 2025 if inflation progresses toward the Fed’s 2% goal and the job market remains strong, expecting tariff effects to be short-lived.**
Caution from Others: Dallas Fed President Lorie Logan and others emphasize patience, noting that current rates are well-positioned, and the long-term risks of premature cuts could lead to inflation spirals.**
Tariff Developments: Recent Fed minutes and Trump’s announcement to double tariffs on steel and aluminum to 50% highlight concerns about supply chain disruptions and longer-lasting inflationary pressures.**

Summary

A growing divide within the Federal Reserve centers on how to address potential inflation from President Trump’s tariffs, with some officials like Governor Chris Waller advocating for overlooking temporary price increases and remaining open to rate cuts in 2025 if inflation nears the 2% target and the job market holds strong. Conversely, others, including Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan, caution against cuts, citing risks of persistent inflation from tariffs and supply chain issues, and prefer maintaining current rates until clarity emerges on trade policies. Waller believes tariff effects will be fleeting, lacking the severe disruptions seen during the pandemic, while recent Fed minutes and Trump’s decision to raise steel and aluminum tariffs to 50% fuel concerns about longer-term price pressures. Logan stresses the importance of patience, noting that monetary policy is well-positioned to adapt as risks evolve, and warns against premature rate cuts that could spark inflation. Meanwhile, Chicago Fed President Austan Goolsbee acknowledges uncertainty but remains optimistic about a path to lower rates if current challenges subside. The debate continues as the Fed balances its dual mandate of stable prices and full employment amidst evolving trade dynamics.

A rate cut debate is heating up inside the Fed

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