The strongest call for "July rate cuts" to date, internal divisions within the Fed intensify.

Author: Bao Yilong, Wall Street Insight

This week, several influential Federal Reserve officials spoke, leading to an increasing divergence on whether interest rates should be cut and when such cuts might occur, creating new uncertainty for investors hoping for further policy easing this year.

On July 17, Federal Reserve Governor Waller spoke candidly in New York, stating that interest rates should be lowered in the July rate decision and should not wait until the labor market deteriorates before adjusting rates. San Francisco Fed President Daly, in an interview, reiterated that two rate cuts within the year are reasonable and warned that waiting until inflation fully reaches the 2% target to act "would likely cause completely unnecessary harm to the economy."

However, earlier that day, Atlanta Fed President Bostic and Fed Governor Cook both publicly stated that the transmission effect of tariffs on prices is becoming evident, and that it is too early to ease policies. Bostic frankly pointed out that the latest CPI data "conveys a different message," suggesting that inflation may be at a "turning point."

These new statements indicate that Trump's tariffs and fiscal policies are causing increasing divisions among Federal Reserve policymakers regarding interest rate cuts: for some hawks, whether it is appropriate to lower rates now; moderates advocate a wait-and-see approach in uncertain circumstances.

Doves worry about economic damage and are open to interest rate cuts

Some policymakers believe that the labor market shows signs of weakness, and an excessive focus on current inflation fluctuations may cause them to miss the best opportunity to support the economy, leading to unnecessary risks.

Federal Reserve Governor Waller is a representative of this viewpoint. At an event in New York, Waller stated plainly that the Federal Reserve should cut interest rates by 25 basis points in July. Waller's main argument is that the U.S. labor market is showing undeniable signs of weakness. He stated:

Considering various soft and hard data, what I see is a labor market on the brink of danger.

He believes that the risk of a weakening labor market has become "very large and sufficient" to justify a rate cut. Based on his cautious assessment of the overall economic outlook, Waller added:

The economy is still growing, but its momentum has significantly slowed, and the risks facing the FOMC's employment mandate have increased.

On the same day, San Francisco Federal Reserve President Daly stated in an interview that she still believes the Federal Reserve's plan to cut interest rates twice this year is "a reasonable outlook." Daly warned that:

Policymakers cannot wait indefinitely, because if we wait until inflation clearly reaches the 2% target, we are likely to have harmed the economy in a completely unnecessary way.

However, Daly acknowledged that there are signs that tariffs are pushing up the prices of goods, but she is also encouraged by the ongoing deflationary trend in the service sector.

She believes that currently, businesses are still bearing the costs associated with tariffs, and consumer spending remains stable, which gives the Federal Reserve room to maintain interest rates as inflation moves toward its target. However, this does not mean that rate cuts should be indefinitely postponed.

Hawkish voices intensify, warning of an inflation inflection point

However, not all officials hold a lenient stance.

On Thursday, Atlanta Federal Reserve President Bostic pointed out in a media interview that potential signs in the economy indicate that inflationary pressures are rising, which is a "concerning source."

He emphasized that although the inflation data over the past few months has performed well, the latest CPI report may signal the arrival of a "turning point." Therefore, he clearly stated:

Now I will choose to wait.

On the same day, Federal Reserve Board member Cook also expressed a similar view, stating that the central bank should keep interest rates stable "for a period of time." She mentioned this at an event:

Considering that the job market remains solid, and short-term inflation expectations and commodity inflation have risen due to tariffs, maintaining the current restrictive policy stance is crucial for anchoring long-term inflation expectations.

Kugler also cited the latest data predicting that the PCE data may see a year-on-year increase from 2.3% in May to 2.5% in June. According to her analysis, due to the backlog of corporate inventories and frequent changes in trade policy, the greater impact of tariffs on prices may not have been fully reflected yet.

As mentioned earlier, on Wednesday, New York Federal Reserve President Williams expressed a similar view at an event, stating that although the current comprehensive data shows only a relatively limited impact from tariffs, it is expected that tariffs will contribute about one percentage point to inflation from the second half of this year until 2026. He emphasized:

I expect these impacts to intensify in the coming months. Maintaining a moderately restrictive monetary policy stance is entirely appropriate.

Diverging Policy Outlook, Market Cautiously Bets on September Rate Cut

The differing views of officials have already been reflected in the latest economic forecasts released by the Federal Reserve in June.

At that time, predictions indicated that among the 19 officials present, 10 expected at least two rate cuts by the end of this year, while 7 believed there would be no rate cuts until 2025, reflecting differing internal judgments on the inflation outlook.

(Federal Reserve June SEP dot plot)

This divergence directly affects the market's policy expectations. Although several officials have recently made hawkish remarks, investors have not completely abandoned hopes for interest rate cuts. The market believes that the likelihood of the Federal Reserve deciding to cut interest rates at the September policy meeting is slightly above 50%.

(The expectation of an interest rate cut in September is slightly above 50%)

Investor bets stand in stark contrast to the cautious attitudes of some officials, highlighting the critical influence that economic data, especially inflation and employment data, will have on the Federal Reserve's final decisions in the coming months.