The Federal Reserve is currently in a fascinating predicament, grappling with when to resume lowering interest rates. After pausing earlier this year due to inflation fears spurred by President Trump's tariffs, officials are now divided into (approximately) three camps.
A cautious center isn't opposed to resuming cuts per se but wants to see more inflation and labor market data before making a move. They believe it's too soon to cut with the inflation outlook still unsettled, even if tariffs haven't had the dire impact many expected. San Francisco Fed President Mary Daly pointed out that businesses are finding resourceful ways to absorb or work around higher costs, which could lead to a "more muted impact of tariffs than we thought."
This group of cautious centrists faces opposing minorities. On one side are two Fed governors arguing for immediate cuts. Fed governor Chris Waller, who has privately indicated he'll dissent against Wednesday's decision to hold rates steady, contends that the headline unemployment rate masks underlying weakness in private-sector hiring and waiting risks damaging the labor market. "If you're talking about [a cut in] September, what are you waiting for?" he asked.
Conversely, a third group is wary of cutting at all if the economy looks fine, fearing that price pressures from tariffs could still build. Atlanta Fed President Raphael Bostic worries that a "constant drumbeat" of inflation concerns could shift how Americans perceive costs, making temporary tariff effects more enduring.
This internal debate is happening amidst unprecedented political pressure from President Trump. Ultimately, the Fed is weighing the risks: cutting too soon and potentially reigniting inflation, or waiting too long and risking damage to the labor market. As former Dallas Fed President Robert Kaplan put it, being "a meeting or two late" is manageable, but "you want to avoid mistakes where you do something where it might take a year or two to then rectify the situation."
