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Donald Trump’s tariffs have opened a schism at the Federal Reserve as top policymakers spar over whether to cut interest rates as soon as this summer or hold them steady for the remainder of 2025.
Christopher Waller, a Fed governor seen as a candidate to replace Jay Powell as its next chair, on Friday called for a rate cut as soon as next month and played down the risks that US president’s levies would push up inflation.
“We’ve been on pause for six months thinking that there was going to be a big tariff shock to inflation. We haven’t seen it,” Waller, who became a Fed governor in 2020 after Trump nominated him to the post during his first term, said in a CNBC interview.
“We should be basing policy on the data.”
Waller’s comments came just two days after the Fed kept rates on hold for its fourth meeting in a row in a unanimous decision, following 1 percentage point of reductions in 2024.
Trump has sharply criticised the Fed for not slashing rates, with the president this week calling for as much as 2.5 percentage points of cuts and deriding Powell as an “American disgrace”.
He also mused about whether he should “appoint myself” to the world’s most influential central bank.
A set of projections released on Wednesday showed a widening divide among the central bank’s top policymakers on whether or not they would be able to cut rates multiple times this year — or not at all.
Powell, whose term as Fed chair ends in May 2026, acknowledged on Wednesday that there was a “pretty healthy diversity of views on the committee”, but noted that there was “strong support” for the decision to keep interest rates on hold for now.
The Fed chair also expected that differences among committee members would “diminish” once more data on the economy came in over the coming months. “With uncertainty as elevated as it is, no one holds these rate paths with a lot of conviction,” he said.
There were still 10 members expecting two or more quarter-point cuts this year, according to Wednesday’s economic projections. But seven now forecast no rate cuts and two are expecting one cut.
“One notable thing is the number of Fed officials who think there should be no cuts has grown. There is clearly a difference in opinion among the committee,” said Rick Rieder, BlackRock’s chief investment officer for global fixed income, who oversees about $2.4tn in assets.
The debate at the Fed centres on whether to keep borrowing costs higher because of expectations that Trump’s tariffs will raise prices, or cut rates to offset any softening of economic growth.
Rates at 4.25-4.5 per cent are considered to be above the so-called neutral level, which neither accelerates nor slows the economy.
The Fed’s projections this week showed that policymakers overall expect a significant slowdown in growth this year and an increase in inflation.
But price increases from tariffs so far have remained muted, with the May reading for consumer price index inflation last week coming in softer than expected, with prices rising 2.4 per cent from the previous year. While some officials think the US jobs market remains solid, others believe the labour market is weakening in some sectors.
Powell on Wednesday warned that the central bank’s “obligation is to keep longer-term inflation expectations well anchored”. Inflation remains above the Fed’s target of 2 per cent.
“For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” he said.
Futures markets signal that investors expect two quarter-point cuts this year, beginning in October, according to Bloomberg data.
“I think Waller was reflecting honestly on how the Fed is a lot closer to cutting than they’re letting on, they just need some sort of a more definitive confirmation from the economy that they need to move,” said Steven Blitz, chief US economist at TS Lombard.
