US Fed is set for contentious debate as investors eye fall rate cut

[NEW YORK] US Federal Reserve officials are determined to hold interest rates steady a little while longer, though an increasingly contentious debate at this week’s policy meeting may bolster expectations for rate cuts in the fall.

Fed chair Jerome Powell is under intense pressure from US President Donald Trump and his allies to reduce borrowing costs, and may face multiple dissents this week from officials who want to provide support to a slowing labour market.

But the US central bank is widely expected to leave its benchmark rate unchanged at the conclusion of its two-day meeting on Jul 30 as policymakers await more data revealing the impact of tariffs on consumer prices.

“Even as we don’t see any change in the policy rate, I think we see hints that we are at a turning point in the policy path,” said Sarah House, senior economist at Wells Fargo. “But of course, most of the committee doesn’t seem to be there yet, I think they are still wary of what happens with inflation regarding these tariffs.”

Fed officials will publish a post-meeting statement on Wednesday (Jul 30) at 2 pm in Washington, and Powell will hold a press conference 30 minutes later. Interest-rate futures show investors are betting on a likely rate reduction at the next meeting, in September, and Fed-watchers will be listening for anything that helps ratify that view.

The rate decision lands in the middle of a week jam-packed with key economic data releases, including a monthly employment report due on Friday. Economists expect it to show a slowdown in hiring in July as uncertainty around Trump’s trade policy continued to weigh on the outlook.

Dissents

Many analysts see a possibility of dissents from Fed governor Christopher Waller and Fed vice-chair for supervision Michelle Bowman, two Trump appointees who have expressed concern that rates are too high given rising risks to employment.

Waller hinted at a dissent earlier this month, saying the Fed should move now to support a labour market that is “on the edge”. Bowman also said in June that she could support a rate cut as soon as this month if price pressures remain subdued.

If both Waller and Bowman cast dissenting votes, it would be the first time two governors did so since 1993. Waller is considered to be among the candidates Trump is considering to replace Powell when his term as chair expires in May.

Some commentators have shrugged over divisions appearing in the vote. In a note to clients on Friday, Michael Feroli, chief US economist at JPMorgan Chase, said he’d view two dissents as “more about auditioning for the Fed chair appointment than about economic conditions”.

Diane Swonk, chief economist for KPMG, noted that dissents are common close to policy turning points.

“One should expect dissent as the Fed gets closer to deciding when to cut rates, given the wide band of uncertainty over how tariffs play out,” she wrote in a note to clients on Thursday.

While Waller and Bowman are increasingly focused on the central bank’s employment mandate, most others are still more concerned about inflation. Uncertainty over how tariffs will affect prices and how the central bank should respond was evident in projections policymakers issued in June: Of the 19 officials, 10 wanted at least two quarter-point rate cuts this year, and seven officials pencilled in no reductions.

Recent inflation reports showed price increases for some goods affected by tariffs, including toys and appliances. But underlying inflation also rose by less than expected in June for a fifth straight month, according to the consumer price index, suggesting price pressures are not yet becoming broad-based.

“Given the post-Covid-19 inflation playbook, some Fed officials are more cautious that tariffs might take longer to show up,” said John Briggs, head of US rates strategy at Natixis North America. “The problem is for the Fed, you are just pushing off that data clarity, and this constant delay is just delaying the Fed’s resolve.”

Natixis expect the Fed to resume its easing cycle in October and to continue with a series of quarter-point reductions to June 2026.

Press conference

In his press conference, Powell will almost certainly face questions about tariffs and inflation. He’s likely to remain cautious, repeating his message that officials have an obligation to maintain price stability with inflation still running above the Fed’s 2 per cent target.

The Fed chair could also acknowledge that better-than-expected data and recently announced trade deals reduce the likelihood of a worst-case scenario for inflation, echoing comments by other officials in recent weeks and opening the door to a September cut.

By the time policymakers gather Sep 16 to 17, they will have two more jobs reports in hand, along with more data on inflation, spending and housing.

By then, according to Andrzej Skiba at RBC Global Asset Management, officials may be in a position to lower rates unless there’s an aggressive escalation of tariffs or inflation data surprises to the high side.

So far, however, economists have been left to puzzle over why tariffs have not made a bigger impact on prices. A range of factors could be at play, including moves by businesses to build inventories before tariffs hit and burden-sharing across the supply chain, said Gregory Daco, chief economist for EY-Parthenon.

“I would anticipate that Chair Powell is going to highlight these mechanics and highlight that these cost pressures are starting to show up, but still maintain an even-keeled narrative,” Daco said.

Powell has faced extraordinary pressure from Trump this year, including threats of termination. Republicans’ attacks on the central bank in recent weeks have homed in on its US$2.5 billion building renovation project, culminating on Thursday in a tour of the construction site by Trump himself.

The Fed chair will probably field questions from reporters on Wednesday about the attacks, though he will likely keep his message focused on the economy.

“Chair Powell’s binder of prepared answers to predictable questions will be thick with material that has nothing to do with monetary policy,” Feroli wrote in his note. “We expect that all of these will be wasted opportunities by members of the press corps, as Powell will repeat that he is focused on the job Congress has given him.” BLOOMBERG