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'It’s not political': Waller again calls for rate cut in July, reinforcing Fed divide.

general :: 1day ago :: source - yahoo finance

By Jennifer Schonberger

Federal Reserve governor Christopher Waller reiterated Thursday that he believes the Fed could consider cutting rates later this month because any inflation from tariffs will be temporary, underscoring a new divide within the central bank.

“I think we're just too tight and we could consider cutting the policy rate in July,” said Waller, adding, “It’s not political.”

Some of his colleagues made varying comments on the same topic Thursday, illustrating the opposing camps now forming inside the central bank on the question of President Trump's tariffs and how they will affect how the Fed acts on rates.

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

St. Louis Federal Reserve president Alberto Musalem said he is undecided about whether inflation from tariffs will be a one-time boost or longer-lasting, noting that "it's going to take time for the tariffs to settle and determine what people are actually paying." Many colleagues share this cautious view.

San Francisco Fed president Mary Daly was slightly more dovish, although not as much so as Waller. She said she still sees two cuts this year as likely and suggested that the September meeting was the next opportunity.

Waller’s arguments carry increasing weight since he is considered to be among the candidates to replace Jerome Powell as Fed chair next May, when Powell’s term is up.

Federal Reserve Governor Christopher Waller speaks during The Clearing House Annual Conference in New York City, U.S. November 12, 2024. REUTERS/Brendan McDermid · REUTERS 

He has been outspoken since the Fed’s last meeting in June about the case for cutting rates sooner rather than later. One of his colleagues, Michelle Bowman, has made the same argument for a cut at the meeting on July 29-30.

Read more: How jobs, inflation, and the Fed are all related

“We're not seeing a lot of tariff inflation yet,” Waller added Thursday. “For that reason, I've been arguing that we could start lowering the policy rate from our current setting.”

These views align with those of President Trump, who has repeatedly called on the Fed and Powell to ease monetary policy, citing what he views as a lack of inflation thus far from tariffs and the savings that could be made if the US were paying lower interest on its debt.

Trump renewed his call for a rate cut on Thursday, posting on Truth Social that the Fed should “rapidly lower the rate” to reflect the country’s strength. In the same post, he praised Nvidia (NVDA) and declared that the US is “back".

But many others at the central bank are not so sure that tariff inflation will just come and go and want more time to assess when cuts should begin. They include Powell, who has cited a resilient economy as he argues for a patient approach.

The strength of the economy, he has said, gives the Fed time to assess whether Trump's tariffs will, in fact, push inflation higher over the summer.

These divisions were apparent in the minutes from the Fed’s policy meeting in June that were released Wednesday.

There were some members participating in that last meeting who said they don’t see any rate cuts happening this year because they believe there is “meaningful” upside risk to inflation given elevated short-term inflation expectations.

Read more: What experts say about the possibility of additional rate cuts

Most thought that upward pressure on inflation from tariffs may be “temporary or modest” and thought lowering rates sometime this year would be appropriate.

But a “couple” said they would be open to cutting rates as soon as the next meeting in July.

One risk that inflation turns out to be longer-lasting, Musalem said Thursday, is that tariffs are being applied to intermediate goods — items like steel, aluminum, and copper that are used to make products — and that could drive up prices for all products, even those not imported.

Alberto Musalem, President and CEO of the Federal Reserve Bank of St. Louis. REUTERS/Brendan McDermid. REUTERS 

He expects the impact of tariffs to show up in the data during the summer months and into September, when he hopes to be able to form a picture of the direction inflation is going.

But he also cautioned it could take longer and warned about what he called “second-round” effects on actual inflation, or the impact on expectations for inflation, given that inflation has been above the Fed’s 2% goal for four years and that businesses and households are sensitive to inflation.

“The outlook for inflation that I have, that is in accordance with what many private forecasters, is for inflation to increase going forward, mostly owing to the tariffs,” Musalem said.

Daly of the San Francisco Fed sees a couple of scenarios in terms of the impact of tariffs on inflation.

One is a delayed impact that is nonetheless a one-off. Another is that tariffs just don’t materialize into a large increase in price inflation for consumers because businesses find ways to adjust, which is what she is hearing from her contacts.

“With that in mind, I really am of a view that it's time to think about normalizing or adjusting, perhaps not normalizing just yet, but at least adjusting the interest rate to ensure that we can continue to say the economy is in a good place and policy is in a good place,” said Daly.

Source: Yahoo Finance

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