Fed’s Daly Sees Two Cuts in 2025, Says Tariffs’ Price Hit May Be Muted

LiamSci/Tech2025-07-111380

(Bloomberg) -- Federal Reserve Bank of San Francisco President Mary Daly said she still views two interest rate cuts as likely this year and sees a greater chance that the price effects from tariffs may be more muted than anticipated.

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Daly said some firms are negotiating to split up tariff costs so that they don’t have to pass along as much of the expense to their end customer.

“By the time they get to consumers, they’re finding that the pass-through they do have to make is lower and some of it can be taken out of margins,” Daly said Thursday during a virtual discussion hosted by MNI. “It’s possible it just doesn’t materialize to a large increase in price inflation for consumers because the businesses find ways to adjust.”

Policymakers have held borrowing costs steady this year, though a divide has emerged over how many rate cuts officials expect in the second half of 2025.

Minutes from the Fed’s June policy meeting released Wednesday showed that division is due to differences in how officials believe tariffs will affect inflation. Most participants pointed to the risk that the levies could have a more persistent impact, but a few said they expected tariffs would lead to a one-time price increase without affecting longer-term inflation expectations.

The San Francisco Fed chief said the US economy is in a good place, and that growth and consumer spending are moderating, but not yet weakening.

She said inflation is on a path toward the Fed’s 2% target.

“I see two cuts as a likely outcome but again there’s uncertainty bands around everyone’s projections,” Daly said.

Speaking earlier on Thursday, St. Louis Fed President Alberto Musalem said it is too soon to know if the inflationary effects from tariffs will result in a one-time price bump or be more persistent.

“It’s going to take time for the tariffs to settle,” Musalem said Thursday during a discussion in St. Louis organized by the Official Monetary and Financial Institutions Forum. “There’s a scenario where we could be in Q4 this year, or Q1 or Q2 of next year where tariffs are still working themselves into the economy,” he added, referring to calendar quarters.

Musalem said he expects the price effects from tariffs to show up more in the data starting in June, July, August or September.

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“I think as we progress through the year, I’m going to get more comfortable understanding what the total impact of tariffs may be,” he said.

Fed officials will meet July 29-30. Based on pricing in futures contracts, investors currently expect the central bank to cut rates in September.

--With assistance from María Paula Mijares Torres.

(Updates with Musalem remarks starting in the ninth paragraph.)