What Division Inside the Fed Means for Future Interest-Rate Cuts
Fed Chair Jerome Powell has sketched out new conditions that could trigger rate cuts by summer’s end, but inflation remains a big question
By Nick Timiraos
Key Points
- The Federal Reserve is debating how to address risks from President Trump’s tariffs, potentially ending a period of unity.
- Jerome Powell has indicated the Fed might have a lower bar for cutting rates, given milder price readings or softer employment data.
- Internal divisions exist over how to manage any tariff costs, theories on inflation, and the right timing of potential rate cuts.
A brewing debate inside the Federal Reserve over how to address risks posed by President Trump’s tariffs threatens to end a period of relative unity, with officials potentially at odds over whether new cost increases justify keeping interest rates high.
In recent weeks, Fed Chair Jerome Powell has indicated the central bank might have a slightly lower bar for cutting rates than seemed possible this spring, when larger tariff increases threatened to meaningfully push up prices while weakening the economy.
A rate cut isn’t expected this month. Instead, Powell has sketched out a middle ground where milder-than-expected price readings or softer employment data might be enough to justify cuts by the end of the summer—a lower threshold than more obvious signs of deterioration the Fed might have required when larger tariff hikes prompted forecasts of more sharp inflation increases.
Trump’s announcements of larger-than-expected tariff increases in April derailed Fed plans to resume rate cuts this year by creating concerns around a stagflation scenario, in which growth weakens and prices rise.
In that environment, Fed officials would have likely needed to see the economy slow to have more confidence that price increases would be short-lived.
Since then, two developments have animated a possible shift.
First, Trump has dialed back some of the most extreme tariff increases.
This week, the president extended a window for bilateral trade negotiations with more than a dozen countries, revealing latent risks of a global trade war re-escalation after new Aug. 1 deadlines.
Second, tariff-related increases in consumer prices haven’t materialized, though many officials and economists expect price hikes in June and July data that will be reported beginning next week.
That is setting up a crucial test for competing theories about whether tariffs will prove inflationary and is inciting internal divisions over how to manage any costs if forecasts are wrong—in either direction.
It is much easier for businesses to absorb cost increases and avoid larger price hikes “if the average tariff is closer to 10% to 15% than if it’s the kind of levels that the president announced on Liberation Day, which were much higher,” said Robert Kaplan, a former Dallas Fed president who is now vice chairman of Goldman Sachs.
Because of weaker domestic demand and global overcapacity, tariffs “may not be as inflationary as we fear,” he said.
Powell’s shift offers tactical flexibility as officials study inflation and employment data over the next three months. In recent appearances, he has aligned himself with the “significant majority” of Fed officials who expect cuts this year.
And he has described potential rate reductions as resuming a process that was merely put on hold when tariff risks emerged—language that suggests Powell views current rates as temporarily elevated to guard against inflation hazards stoked by tariffs.
The evolution reflects an assessment that inflation risks could take longer to materialize and therefore pack less punch.
If the Fed can maintain a forecast for less dramatic inflation increases, Powell could open the door to cuts by summer’s end based on softer labor markets or better inflation news.
Analysts say stabilization in the unemployment rate last month—hardly the stuff broad-based labor-market deterioration is made of—underscores the Fed’s wait-and-see posture.
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