Fed divided on rate cuts as Trump pressure, tariff inflation complicate outlook

The US Federal Reserve is facing a growing internal split: should it guard against persistent inflation risks or respond to signs of a slowing labour market?

This debate, now playing out against the backdrop of President Donald Trump’s renewed tariff agenda and political pressure on Fed Chair Jerome Powell, is deepening uncertainty about the central bank’s next move.

Policy divide emerges after rate pause

Following its decision this week to hold interest rates steady between 4.25 per cent and 4.5 per cent, Federal Reserve policymakers have begun to publicly express divergent views on the path forward.

Fed Governor Christopher Waller said on Friday he favours a rate cut as early as July, citing cooling inflation and signs of labour market softening, including rising unemployment among new college graduates.

Speaking to CNBC, Waller stated, “The data the last few months has been showing that trend inflation is looking pretty good… We could do this as early as July.”

As per Reuters, Waller also downplayed the inflationary impact of Trump’s new tariffs, arguing they were not significant enough to delay easing. “Any tariff inflation… I don’t think is going to be that big and we should just look through it in terms of setting policy,” he added.

Barkin warns against premature cuts

However, Richmond Fed President Tom Barkin offered a more cautious view in an interview with Reuters. With inflation still above the Fed’s 2 per cent target, and tariff policy still evolving, Barkin argued that the central bank could afford to wait.

“Nothing is burning on either side such that it suggests there’s a rush to act,” Barkin said. “I’m not in a mood to ignore a spike in inflation were it to come… Core inflation is still over target. Being modestly restrictive is a good way to address that.”

This divergence reflects what Barkin called a “bimodal” split within the Fed. According to Reuters, seven policymakers expect no rate cuts this year, while eight anticipate two cuts, likely in September and December in line with investor forecasts.

Trump adds political heat, again

President Trump has added fuel to the debate, ramping up pressure on Powell to cut rates. In a Truth Social post on Friday, Trump wrote: “Maybe, just maybe, I’ll have to change my mind about firing him?” — a fresh threat to remove the Fed Chair he appointed.

As per Reuters, Trump continues to criticise Powell for not cutting rates fast enough, blaming the central bank for hampering economic growth. Despite his repeated threats, Trump has also frequently reversed course. Just days earlier, on June 12, he told reporters, “I’m not going to fire him.”

Powell’s term runs until May 2026, and while a Supreme Court ruling in May reaffirmed the Fed’s unique structure and protections from presidential interference, speculation is mounting about who Trump might nominate as a successor.

Tariffs complicate the inflation picture

Meanwhile, the Fed’s latest monetary policy report, released on Friday, acknowledged that recent import tariffs have already pushed up goods inflation. Though overall inflation remains below expectations, the report suggests that trade policy is beginning to feed into price pressures.

The Trump administration continues to defend the tariff hikes, claiming they will benefit the US economy in the long term. However, the Fed’s internal modelling as reported by Reuters, suggests the cost is likely to fall on consumers.

Fed projections this week indicated slower growth, higher unemployment, and stickier inflation by year-end, all factors that will make future rate decisions more complex.

Powell to face Congress amid rising tensions

Fed Chair Powell is expected to face tough questions from lawmakers when he testifies before Congress on Tuesday and Wednesday as part of the Fed’s regular semiannual hearings.

As quoted by Reuters, Powell on Wednesday said the Fed is prepared to wait for more clarity: “We are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.”

But with political pressure mounting and the Fed split between inflation hawks and labour market doves, all eyes are now on July and whether the data or the politics win out.

(With inputs from the agencies)