Internal Divisions Resurface at the Fed — When Will the Cuts Begin?

TradingKey - The Federal Reserve is facing deepening internal divisions over the timing and pace of interest rate cuts, according to minutes from its June policy meeting. Of the 19 policymakers, 10 support at least two cuts this year, two favor just one, and seven believe rates should remain unchanged in 2024.

Nick Timiraos, often dubbed the “Fed whisperer,” notes that the central bank has effectively split into three camps. The largest faction supports cutting rates later in the year — but not as soon as July. Only two officials, both appointed during Donald Trump’s presidency, are backing a July cut. The remaining group sees no need for rate reductions this year.

X: @Nick Timiraos

Inflation Expectations Fuel Divergence

The core disagreement stems from differing views on how tariffs and broader economic trends are affecting inflation.

The majority argue that a weakening labor market and the modest, transitory impact of tariffs could justify easing policy. Dissenters, however, believe inflation has not made sufficient progress toward the Fed’s 2% target — even without factoring in potential future tariff pressure — and therefore see no case for cuts at this point.

According to Timiraos, inflation data over the next several months will be crucial in testing the Fed’s competing narratives. Should inflation prove more persistent—or more subdued — than expected, he says, internal divisions over how to respond are likely to widen.

When Will the Fed Ease? Analysts Eye Late Summer Window

While no rate move is expected this month, Timiraos believes Chair Jerome Powell has softened his tone compared to earlier in the year, now acknowledging the potential for cuts. Powell appears to be charting a middle course: moderate inflation or a cooling labor market could both justify a reduction before the end of summer.

Analysts at Citigroup expressed a similar view, noting that the minutes suggest rate decisions will hinge on data released between June and August. This aligns with Powell’s recent testimony before Congress, where he emphasized a data-dependent approach. As a result, Citi believes the Fed’s “wait-and-see” period could end by late summer.

According to the CME FedWatch Tool, expectations for a July cut have declined sharply following stronger-than-expected June payrolls, with odds now standing at just 6.7%. However, the probability of a September cut has surged to 71.9%, up significantly from a month ago. Markets are pricing in a 97.1% chance of at least one rate cut before year-end.

Fed Funds Rate Forecast for September, Source: CME FedWatch

Fed Funds Rate Forecast for December, Source: CME FedWatch