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Michelle Bowman, vice chair of supervision at the Federal Reserve, said she would support an interest rate cut as early as July. Fed Chair Jerome Powell continues to reiterate the committee's wait and see approach.Key Takeaways
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At least two Fed officials spoke out in favor of lowering borrowing costs as soon as July, while several others said the Fed should hold interest rates steady for now.
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Lower borrowing costs could boost the economy but may set back the Fed's efforts to reduce inflation to a 2% annual rate.
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Financial markets are betting the "patient" faction led by Fed Chair Jerome Powell will prevail at least for now, assigning a 22% chance of a Fed rate cut in July.
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President Donald Trump has repeatedly demanded the central bank cut the fed funds rate, igniting a debate over whether the Fed, an independent body, should answer to the president.
To cut, or not to cut? That question could divide Federal Reserve policymakers, who are seemingly split on whether the central bank should lower borrowing costs when it next meets in July.
At least three Federal Reserve policymakers spoke out this week in favor of holding interest rates steady for the time being, in contrast to two who said they were open to the idea of cutting rates soon, as President Donald Trump has demanded.
The comments suggested a growing split among members of the committee that votes to set the central bank's monetary policy.
The "wait-and-see" faction is led by Fed Chair Jerome Powell. Powell has argued that the central bank should continue to hold its key federal funds rate at a higher-than-usual level, as it has done all year, out of concern that Trump's tariffs could push up inflation.
The other side, including governors Christopher Waller and Michelle Bowman, has said a rate cut is in order since price increases have been mild in the last four months.
The fed funds rate influences interest rates on all kinds of loans. Lowering the rate could boost the economy by encouraging borrowing and spending. It could also help the federal budget by reducing the amount of interest the government pays on the national debt. In recent weeks, Trump has repeatedly demanded that the Fed lower rates dramatically.
The Case For Patience
Powell and other inflation "hawks " view lowering rates as risky. Trump's movement to impose tariffs on U.S. trading partners is costing importers billions, and some of those costs will be passed along to consumers sooner or later. That could set off a cycle of price hikes, which would be a setback in the Fed's mission to get inflation down to a 2% annual rate.
Powell laid out that argument last week in a press conference following the Fed's policy decision meeting, and again Tuesday and Wednesday in testimony before Congress. The Federal Open Market Committee voted unanimously to hold rates steady last week, but the latest round of comments by Fed speakers raised questions about whether that unanimity would hold in July.
On Wednesday and Thursday, two officials, Thomas Barkin, president of the Richmond Fed, and Beth Hammack, president of the Cleveland Fed, reiterated Powell's viewpoint.
"There is little upside in heading too quickly in any one direction,” Barkin said Thursday in prepared remarks for an event hosted by the New York Association for Business Economics, Bloomberg reported. “Given the strength in today’s economy, we have time to track developments patiently and allow the visibility to improve.”
Hammack said the uncertainty about the economy made the wait-and-see approach sensible. Forecasts have been clouded by major unknowns that will affect the economy's trajectory, such as where Trump will finally set import taxes on U.S. trading partners and what effect the duties will have on the economy.
"When clarity is hard to come by, waiting for additional data will help inform the path ahead," she said Thursday at a conference in London, according to prepared remarks. "It may well be the case that policy remains on hold for quite some time before the committee initiates very modest cuts to return policy to a neutral setting."
Why The Fed Might Cut Sooner
But high inflation isn't the only risk facing the economy. Forecasters expect the tariffs to drag down the economy and hurt the job market in the coming months.
The Fed is tasked with keeping employment high and inflation low. According to prepared remarks, Bowman said Monday at a research conference in Prague that weakness in the job market would put pressure on the Fed to cut rates.
"Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market," she said.
The Fed should cut rates "as early as July," Waller said in an interview on CNBC last week.
Waller is on the short list of candidates that Trump is considering to take Powell's place when his term ends next year, according to a report by the Wall Street Journal. Trump is reportedly considering naming the next Fed chief as early as September, in a bid to put more pressure on the central bank to cut rates. Despite the president making appointments to the committee, the Fed is independent of direct control of the White House.
As of Thursday, financial markets were betting patience would prevail, at least for the time being. Investors were pricing in a 23% chance the Fed would reduce the fed funds rate in July, according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
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