Fed Officials Divided on Rate Cut Outlook: A July Cut Looks Fishy, Fall Cuts More Likely

TradingKey - Since the implementation of Trump tariffs, Federal Reserve officials have remained uncertain about their inflationary impact. After the June FOMC meeting, the dovish camp within the Fed has weakened, and a growing divergence in views among policymakers has emerged regarding the timing of future rate cuts.

On Friday, June 20, Christopher Waller, a current member of the Federal Reserve Board and a potential successor to Fed Chair Jerome Powell, said that the inflationary effect of tariffs may be temporary, and that the Fed could cut rates as early as July.

Waller pointed out that U.S. GDP growth and inflation data are approaching the central bank’s targets, and that the current federal funds rate is now 1.25 to 1.5 percentage points above the estimated neutral rate. He argued that there is room for a rate cut now, and the next move should depend on how inflation evolves.

Waller’s dovish remarks contrasted sharply with the more hawkish tone from other Fed officials. His comments also came amid speculation over the next Fed chair, and amid repeated pressure from President Trump to raise interest rates and even fire current Fed Chair Powell.

Wall Street Journal reporter Nick Timiraos noted that Waller has historically taken a more flexible policy stance, which could give him an edge in the race to lead the central bank.

Also speaking on Friday, Federal Reserve Bank of San Francisco President Mary Daly said that concerns over tariff-driven inflation have eased somewhat, and that while a July rate cut is unlikely, a rate reduction in the fall remains possible.

In contrast, Tom Barkin, President of the Richmond Fed, said that given the potential inflationary effects of tariffs and the continued strength in the labor market and consumer spending, there is no urgency to cut rates at this stage.

He added that the U.S. unemployment rate remains low and that companies do not appear to be on the verge of large-scale layoffs.

Earlier this month, data showed that the U.S. unemployment rate in June remained stable at 4.2%, in line with expectations.

For the PCE price index — due out this Friday — economists forecast that the core PCE (excluding food and energy) will post a third consecutive monthly gain of just 0.1%, potentially marking the weakest three-month rise since the early days of the pandemic in 2020.