Some Fed Officials Back Rate Cuts Even as Powell Signals a Hold

In a widely anticipated move, the US Fed kept its benchmark interest rates unchanged in the range of 4.25% to 4.5% after its meeting concluded last week. However, while Chair Jerome Powell has signaled a pause on rate cuts for now, some Fed officials are calling for a rate cut as early as the next meeting that’s scheduled for July.

Some Fed Officials Back a July Rate Cut

In the most recent instance, Federal Reserve Vice Chair for Supervision Michelle Bowman has backed a rate cut as early as July. “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,” said Bowman in prepared remarks delivered in Prague.

Bowman also noted that the inflationary impact of tariffs imposed by President Donald Trump has been weaker and more delayed than initially feared. She believes that if inflation continues to be subdued, lowering the policy rate would help bring it closer to its neutral setting and sustain a healthy labor market.

“All considered, ongoing progress on trade and tariff negotiations has led to an economic environment that is now demonstrably less risky,” said Bowman.

She is not the only Fed member pushing for early rate cuts, and Fed Governor Christopher Waller has also backed a rate cut. Speaking with CNBC last week, Waller said, “I don’t think we need to wait much longer, because even if the tariffs come in later, the impacts are still the same.” He added, “It should be a one-off level effect and not cause persistent inflation.” Notably, both Bowman and Wallen are Trump appointees.

Meanwhile, Chicago Fed President Austan Goolsbee and a former advisor to Barack Obama also backed cutting rates, saying, “if we do not see inflation resulting from these tariff increases. Then, in my mind, we never left what I was calling the golden path before April 2.” As investors would recall, President Trump announced his “reciprocal tariffs” on April 2, terming it the “Liberation Day.”

Trump Calls Upon the Fed to Cut Rates

Notably, President Trump has been calling for a rate cut and has been quite vocal in his criticism of Powell. “I don’t know why the Board doesn’t override this Total and Complete Moron!” said the President in a Truth Social post last week.

President Trump also highlighted how he believes the rate cut would help the US save on interest costs. “He could do the biggest and best job for our Country by helping to lower Interest Rates and, if he reduced them to the number they should be, 1% to 2%, that ‘numbskull’ would be saving the United States of America up to $1 Trillion Dollars per year,” said Trump.

He added, “I fully understand that my strong criticism of him makes it more difficult for him to do what he should be doing, lowering Rates, but I’ve tried it all different ways. I’ve been nice, I’ve been neutral, and I’ve been nasty, and nice and neutral didn’t work! He’s a dumb guy, and an obvious Trump Hater, who should have never been there.”

Notably, while Trump appointed Powell as the Fed chair, the relations between the two were quite fraught as Powell raised rates during Trump’s presidency, much to his displeasure. In a 2019 tweet, Trump questioned whether Powell or Chinese President Xi Jinping was “our bigger enemy.”

In 2022, Joe Biden reappointed Powell as the Fed chair for four years, and his current tenure would last until mid-2026. Last year, Powell indicated that he would serve his entire tenure while saying that U.S. presidents are “not permitted under the law” to fire members of the Fed.

What’s Powell’s Argument for Not Cutting Rates?

Notably, while US inflation has gradually come down over the last two years, it is still higher than the 2% that the Fed targets. Powell sees upward pressure on inflation amid President Trump’s tariffs. While Trump has lowered the “reciprocal tariffs” on most countries to 10%, imports from China still attract a 55% tariff. Also, there is uncertainty over the future trajectory of these rates, as they are contingent upon trade agreements.

In his speech following last month’s FOMC meeting, Powell said, “Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs.” He added, “It will be someone in that chain that I mentioned, between the manufacturer, the exporter, the importer, the retailer, ultimately somebody putting it into a good of some kind or just the consumer buying it.”

The Fed chair cautioned that the cost of tariffs, at least in part, will have to be paid by the US consumers. He said, “All through that chain, people will be trying not to be the ones who can take up the cost but ultimately, the cost of the tariff has to be paid. And some of it will fall on the end consumer.”

Powell Plays the ‘Wait and Watch Game’

Powell, meanwhile, reiterated that the Fed is ready to play a “wait and watch” game on future rate cuts. He dashed the possibility of rate cuts in the near term, saying, “The economy seems to be in solid shape, so the labor market is not crying out for a rate cut.”

The Fed chair echoed similar views in his testimony before the House Financial Services Committee yesterday and said, “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.”

He added, “The FOMC’s obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.”

Markets See a Fed Rate Cut in September

Meanwhile, markets are not pricing a July rate cut, and CME’s FedWatch tool shows that just over a fifth of traders see a Fed rate cut next month. The odds, however, rise to 68.8% for the Fed meeting, and only 14.3% traders see rates at the current level after that meeting.