The Federal Reserve, long known for its careful consensus-building, is now confronting a rare bout of internal disagreement as officials debate how to respond to the economic risks posed by President Trump’s tariffs. The discussion, which has grown more urgent in recent weeks, centers on whether new cost pressures from tariffs warrant keeping interest rates at elevated levels or if the central bank should prepare to ease policy in the months ahead.
Fed Chair Jerome Powell has recently signaled a more flexible stance, suggesting that the bar for cutting rates may be lower than it appeared earlier this year. In the spring, when the administration announced unexpectedly large tariff increases, the Fed grew more cautious, worried that higher import costs could both slow economic growth and push up prices—in other words, stagflation. Those concerns led officials to pause plans for rate cuts, awaiting clearer evidence on how the new trade barriers would impact the economy.
Since then, the landscape has shifted. President Trump has scaled back some of the most aggressive tariff measures, and the White House has extended negotiations with several trading partners, pushing back the risk of a renewed escalation in the trade war. Meanwhile, the anticipated surge in consumer prices tied to tariffs has not yet appeared in official data, although many at the Fed expect that its effects could become clearer in inflation reports due later this summer.
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This evolving backdrop has sparked a test of competing economic theories within the central bank. Some officials argue that businesses can absorb modest tariff increases without passing higher costs on to consumers, especially given subdued domestic demand and excess capacity worldwide. Others warn that it is too soon to conclude that inflation will remain contained, noting that supply chain disruptions or delayed price hikes could still push up costs for households.
The minutes from the Fed’s June policy meeting, released this week, lay bare these divisions. While there remains broad agreement that the central bank should not rush to cut rates, officials are split over how persistent the inflationary impact of tariffs might be. A significant minority of policymakers maintain that upward pressure on prices could be temporary or modest, while others fear that inflation could become entrenched if businesses and consumers adjust their expectations.
Most Fed officials continue to expect at least some reduction in interest rates by the end of the year, but the majority want to wait for more data before taking action. Only a few, including Governors Christopher Waller and Michelle Bowman—both appointed during the Trump administration—have openly advocated for an immediate cut, arguing that tariff-driven price increases are likely to be short-lived.
As the summer unfolds, the central bank’s next steps will hinge on how the data evolves. If inflation remains subdued and the job market shows signs of strain, the case for rate cuts could strengthen. But if price pressures mount or the economy proves more resilient than expected, the Fed may opt to keep policy on hold for longer.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
