Fed Vice Chair Advocates for Rate Cut Amid Internal Disagreement

Federal Reserve Vice Chair for Supervision Michelle Bowman has advocated for an interest rate cut as early as July 2025, citing limited inflationary impacts from President Donald Trump's recent trade policies and emerging economic data. Speaking in Prague on June 24, Bowman emphasized that the evolving trade environment justifies a policy adjustment to maintain a healthy labor market and align rates with a neutral setting.

Bowman's remarks highlight a growing divide within the Federal Reserve regarding monetary policy. While some officials, including Fed Governor Christopher Waller, support rate reductions to sustain economic growth, others remain cautious, emphasizing the need to control inflation. This internal debate unfolds against the backdrop of President Trump's aggressive tariff measures, which have raised the U.S. effective tariff rate from 2.5% to 27% by April 2025.

In her speech, Bowman downplayed the inflationary impact of the tariffs, suggesting any resulting price increases would be minor and temporary. She argued that if inflation remains subdued, a rate cut would be appropriate. Her stance aligns with similar sentiments from Waller, who cited rising joblessness among graduates and general economic slowdown as reasons to act preemptively. These views contrast with Fed Chair Jerome Powell’s cautious stance, advocating for more data before making any decisions.

The bond market responded to Bowman's comments, with the two-year Treasury yield falling, indicating market anticipation of a possible easing of monetary policy in the near future.

President Trump's trade policies have been a significant factor in the current economic landscape. In his second term, Trump implemented a series of protectionist tariffs, raising the United States' effective tariff rate from 2.5% to 27% by April 2025. These tariffs have targeted countries including Canada, Mexico, and China, leading to retaliatory measures and escalating trade tensions. The administration justified these tariffs by citing large trade deficits and a desire to promote domestic manufacturing. However, these policies have also raised concerns about potential inflationary impacts and economic growth.

The Federal Reserve is experiencing internal divisions regarding the direction of monetary policy. While some officials, like Bowman and Waller, advocate for rate cuts to support the labor market and address economic uncertainties, others prefer to maintain current rates to curb inflation. This divergence reflects differing assessments of economic data and the potential impacts of trade policies.

Atlanta Federal Reserve President Raphael Bostic advised against immediate interest rate cuts, citing upcoming price hikes driven by tariffs and a still robust job market. In an interview, Bostic emphasized the Fed has “time and space” to observe how ongoing trade policies, particularly new U.S. import tariffs, influence the economy. He projects only one rate cut late in 2025, assuming economic growth slows to 1.1% and inflation approaches 3% by year-end. Despite pressures—including President Trump's calls for early cuts and inflation data prompting some Fed officials to consider rate reductions as early as July—Bostic remains cautious. He prefers maintaining the current 4.25%-4.5% rate to ensure inflation stabilizes near the Fed's 2% target.

President Trump has intensified his campaign to pressure the Federal Reserve into cutting interest rates, with several senior officials, including Commerce Secretary Howard Lutnick, echoing his criticism of current monetary policy. Lutnick publicly criticized Fed Chair Jerome Powell for being overly cautious, urging for a reduction in the benchmark interest rate currently around 4.4%. This marks a shift from Trump's first term, where only the president publicly pushed for rate cuts. Recent economic data showing low inflation adds some merit to the administration’s argument for easing rates. However, concerns exist that if markets perceive rate decisions as politically motivated, long-term inflation expectations could rise, undermining market stability.

The Federal Reserve's upcoming meetings will be closely watched as officials weigh the potential benefits of rate cuts against the risks of inflation and economic instability. The internal debate within the Fed, coupled with external pressures from the administration, underscores the complexity of navigating monetary policy in the current economic environment.