Written by: He Hao, Wall Street Journal

The latest June meeting minutes released by the Fed show that divisions among officials regarding the interest rate outlook are becoming increasingly apparent, mainly stemming from their differing expectations of how tariffs might affect inflation.

Nick Timiraos, a well-known financial journalist referred to as the 'New Fed Communicator,' wrote that at last month's meeting, the unclear inflation outlook, along with pressure from the White House on Chairman Powell, led to divisions within the Fed, with officials differing on whether and when to resume rate cuts, although most Fed officials expect to resume rate cuts later this year.

According to the minutes of the Federal Open Market Committee (FOMC) meeting held from June 17 to 18, while some participants noted that tariffs would lead to a one-time increase in prices without affecting long-term inflation expectations, most participants believe that tariffs could have a more lasting impact on inflation.

The June meeting minutes show that policymakers pointed out there is 'considerable uncertainty' regarding the timing, magnitude, and persistence of the potential impact of tariffs on inflation. Due to the varied transmission paths of tariffs in the economy and different outcomes from trade negotiations, officials hold differing views on their inflation impact.

Those officials who believe that it may be appropriate to cut rates later this year argue that a weakening labor market or slight and temporary inflationary pressures caused by tariffs could justify a rate cut. However, a significant portion of officials, although not in the mainstream view, believe that even without considering the potential exacerbation of tariff impacts in the coming months, current inflation has not made sufficient progress towards the Fed's 2% target to justify a rate cut.

At the June meeting, the FOMC voted unanimously to keep the interest rate in the range of 4.25%-4.5%, marking the fourth consecutive time they held steady, which again drew criticism from President Trump, who has repeatedly called for lower borrowing costs. The new interest rate forecasts released after the June FOMC meeting show that 10 of the 19 officials expect at least two rate cuts before the end of the year, while 7 policymakers expect no cuts in 2025, and two others expect one rate cut.

Federal Reserve officials and their team of economists believe that the risks of a sharp economic slowdown or a significant rise in inflation have eased since the last meeting in early May, primarily due to President Trump's choice to ease his stance in several trade disputes. Nevertheless, the minutes indicate that officials still believe the risks of upward inflation and a weak labor market are high. Most officials are more concerned about inflation risks than about a slowdown in economic growth.

The meeting minutes also suggest that both Fed officials advocating for rate cuts and those supporting the status quo believe that current interest rates may not be significantly above the neutral rate, which neither stimulates nor suppresses economic growth. This means that even if officials resume rate cuts without seeing significant economic deterioration, they may only make limited small adjustments.

The complex situation brought about by tariffs

The June meeting minutes emphasize that the rapidly changing economic policy environment has made the Fed's policy judgments more complex. Trump has expanded the range of tariffs imposed on U.S. trading partners while advancing policy changes in areas such as taxation, immigration, and regulation, which have exacerbated economic uncertainty.

The minutes note: 'Participants believed that the uncertainty surrounding the economic outlook remains high against the backdrop of evolving trade policy, other government policies, and geopolitical risks, but overall uncertainty has diminished compared to the previous meeting.'

Most economists expect that tariffs will raise inflation and dampen economic growth. Federal Reserve Chairman Powell has stated that without tariffs, the Fed might have further cut rates this year.

However, the current economic data has not yet shown widespread effects from tariffs, which has sparked debate among policymakers about how, when, and to what extent tariffs will raise prices.

The next important data point is the U.S. Consumer Price Index (CPI) for June, which will be released on July 15.

Patient response

Since the June meeting, Fed governors Waller (Christopher Waller) and Bowman (Michelle Bowman) have indicated that, given recent moderate inflation data, they might support a rate cut this month. The minutes show that 'a few' officials are willing to consider a rate cut at the meeting on July 29-30.

Most officials believe that 'some degree of' rate cuts this year may be appropriate.

However, most Fed officials still believe that the overall stability of the U.S. economy allows for patience in adjusting interest rates. The minutes note that policymakers view economic growth as 'robust' and the unemployment rate as 'low'.

The minutes state: 'Participants unanimously agreed that while uncertainty regarding inflation and the economic outlook has diminished, a cautious approach should still be taken when adjusting monetary policy.'

Although last week's U.S. labor market data showed localized weakness, it remains overall stable, which may alleviate pressure on officials to cut rates at the July meeting.

Federal funds futures contracts indicate that investors expect a rate cut in both September and December. Timiraos points out that Powell's recent public statements have not paved the way for a rate cut in July, and the market generally believes that September is more likely to become the starting point for a rate cut. At last month's congressional hearing, Powell did not preemptively judge that inflation would ease soon to support a rate cut, stating:

We are still observing, and we will receive the inflation data for June, followed by that for July. We are fully open to the possibility that the transmission effects of tariffs on retail prices may be less than expected. If that is indeed the case, it would impact our policy.

In addition, policymakers continue to discuss the regular evaluation of the Federal Reserve's policy framework, including strategic documents that guide its monetary policy execution. The minutes show that officials preliminarily discussed how to strengthen communication tools, including the possibility of adjusting the Summary of Economic Projections (SEP) and the potential for 'broader use of alternative scenario analysis'.