On Whether to Cut Interest Rates: Two Factions Emerge Within the US Fed

Judging from the recent statements of an increasing number of Fed officials, a divergence is emerging within the US Fed, as officials attempt to determine whether the inflation caused by US President Trump's tariff measures will persist for a longer period. Against this backdrop, they hold differing views on whether interest rates should remain stable for an extended period or whether they can cut interest rates with relative ease later this year...

Some policymakers advocate treating the impact of tariffs as "transitory" and thus "ignoring" it to a certain extent, a stance that would open the door to interest rate cuts. However, many officials on the Federal Open Market Committee (FOMC), which sets interest rates, believe that the inflation triggered by tariffs may become more persistent.

Dovish camp

Christopher Waller, a Fed governor who had taken a hawkish stance in the past few years, now undoubtedly stands firmly in the aforementioned first, "more dovish" camp. On Monday, he once again elaborated on why any impact of Trump's tariffs on inflation may not be long-lasting...

In a speech in Seoul, South Korea, on the same day, Waller said, "Given my belief that any tariff-induced inflation will not persist and that inflation expectations are stable, I support ignoring the near-term impact of tariffs on inflation when setting policy interest rates."

This statement can be said to be largely in line with the White House's view that any tariff-induced price increases will be short-lived. Trump himself has repeatedly called on Powell and the Fed to cut interest rates for this reason.

Waller said that the US's "strong" labour market and recent progress in achieving the Fed's 2% inflation target provide policymakers with time to observe the evolution of trade negotiations.

However, he also pointed out, "Assuming that actual tariff rates remain stable near the modest tariff scenario I envision, core inflation continues to move towards our 2% target, and the labour market remains robust, I am willing to support an interest rate cut later this year based on 'good news'."

Chicago Fed President Austan Goolsbee also said on Monday that tariff uncertainty is creating some of what he called "dust in the air," but "I still think that beneath that, we are basically on the path to interest rate cuts."

"If we can get through this bumpy period, the prospects for achieving our dual mandate still look pretty good to me," he added.

Hawkish camp

However, in contrast to the aforementioned "dovish camp," other members of the Fed, including Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan, are currently more explicitly advocating for maintaining stable interest rates.

Last week, Kashkari stated that he believed trade negotiations could take months or even years to resolve, and with retaliatory responses from US trading partners, tariff increases might lead to a tit-for-tat situation.

Therefore, he hoped that the US Fed could maintain stable interest rates until there was more clarity on the tariff path and its impact on prices. "Given my strong emphasis on safeguarding long-term inflation expectations, I find this argument more compelling," he added.

In addition, Dallas Fed President Logan also sent a subtle message last week about maintaining stable interest rates amid calls from Trump for interest rate cuts. She stated that interest rates were now in a "good place" and that it might take "quite some time to know whether the balance of risks is shifting in one direction or the other."

She added that the impact of interest rate changes takes time to materialize, and to maintain balance, the US Fed needs to consider the direction of the economy, not just its current position. "In the short term, the central bank can always increase employment by cutting interest rates. People might enjoy a period of relief. But over time, excessive interest rate cuts will trigger spiral inflation."

On Monday, she reiterated in Dallas that the US Fed faces risks in both aspects of its dual mandate of stable prices and full employment. "Monetary policy is indeed in a favorable position. We can afford to be patient and observe the data, because we know that if there are substantial changes in the risks on either side, we are in a good position to take action."

Key Decision This Month Amid Diverging Views

In fact, similar divergences were already evident during the US Fed's May policy meeting.

According to the minutes of the US Fed's May meeting released last week, some officials believed that imposing tariffs on intermediate goods (parts used in manufacturing products, such as steel or aluminum) could lead to more sustained increases in inflation. Multiple officials argued that supply chain disruptions caused by tariffs could also have a more lasting impact on inflation, reminiscent of such impacts during the pandemic.

However, some officials also indicated that various factors might offset the upward and persistent trend in inflation, including reducing imposed tariffs through trade negotiations, low consumer acceptance of price increases, a potential economic slowdown, or companies shifting their focus to expanding market share rather than raising prices.

All of this may bring more uncertainty to the US Fed's June policy meeting later this month—although the market generally expects the US Fed not to cut interest rates this month, the interest rate dot plot released alongside the monetary policy statement this month may reveal the true views of US Fed officials on the potential for interest rate cuts in the remainder of the year.

In the dot plot released in March this year, 11 out of 19 policymakers projected at least two interest rate cuts this year. Whether that many officials would still support two rate cuts this month will undoubtedly become the focus for many market participants...