Federal Reserve officials are having a hard time agreeing on what lies ahead for the U.S. economy in a time of unprecedented tariffs, a straining debt ceiling, and political upheaval.
Throughout the spring, the Fed was mostly in agreement there was no rush to cut interest rates. The central bank was content to wait and see how exactly President Donald Trump’s tariff policy would impact the economy. A series of revised forecasts in the aftermath of the tariffs called for lower growth and rising inflation. But the details themselves were still debated: How high would inflation go? How long would it last? Would businesses layoff employees if growth stalls?
Now, three months on from the early-April tariff announcement, Fed officials are starting to formulate their own answers to those questions.
Among the most dovish officials are Fed Board governors Michelle Bowman and Christopher Waller, who believe rate cutting should begin as early as this month. In two public appearances on Thursday and Friday, Waller called for rate cuts to start at the Fed’s meeting on July 29-30. Others like John Williams, president of the Federal Reserve Bank of New York, and Susan Collins, president of the Federal Reserve Bank of Boston, see a July rate cut as too early because there is still the possibility of further inflation over the course of the year.
These two schools of thought don’t just differ on the timing of rate cuts, but on what is the larger threat to the economy: mass layoffs or soaring inflation. Those in Waller and Bowman’s camp fear middling growth will cause the U.S. to flatline, forcing businesses to cut costs, including by shedding employees. On the other hand, those who favor holding rates believe a cut would only exacerbate the accelerating inflation they see as likely, if not certain.
The prevailing view is that the Fed will keep interest rates steady at its upcoming meeting. The CME FedWatch tool sees a 95% chance of a rate hold at the upcoming meeting.
On Friday in an interview with Bloomberg TV, Waller outlined the case for a rate cut he saw as necessary to push a teetering labor market toward safety. The labor market’s solid headline numbers masked a weakening in the private sector, Waller argued. The latest Bureau of Labor Statistics report from June outpaced expectations, with the U.S. adding 147,000 jobs and an unemployment rate of 4.1%. An earlier report that specifically tracks the private sector showed it had lost 33,000 jobs in June.
Waller said he wanted the Fed to act now, before the labor market turned for the worse.
“If you’re walking on a lake and the ice is frozen, it sounds safe but when you start hearing cracks—and that’s what I feel like—it’s too late once you go through the ice,” Waller said. “So you’ve got to start prepping in advance before you have that happen.”
Waller’s more hawkish colleagues are wary of cutting rates and loosening monetary policy at a time they believe it should remain restrictive.
Inflation started to creep up in June, according to the Consumer Price Index report released this week. Prices rose 2.7% over the last 12 months, an uptick from 2.4% in May. The most recent CPI also showed early signs tariffs were pushing prices higher. Consumer staples like clothes, toys, and electronics, which are the exact sorts of products that rely heavily on foreign manufacturing, all saw their prices increase.
“For items that are more exposed to higher tariffs…price increases so far this year have been well above what one would expect based on past trends,” Williams said on Wednesday.
Few dispute prices will rise because of tariffs. The split is over whether they will persist or smooth out quickly. Most economists argue any increases are only now starting to show up in the economic data because many companies had stockpiled inventory anticipating the tariffs. Textbook economics would suggest tariffs only lead to a one-time price shock. At the same time, the Trump administration’s goal with its signature tariff policy has been to rewrite the rules of global commerce, making for little historical precedent to guide Fed officials and economists.
Waller preferred to look through the inflation risk.
“With inflation near [the Fed’s 2%] target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate,” he said on Thursday.
The Fed’s debates about monetary policy come against a bellicose political backdrop, in which the central bank’s traditional independence is eroding. Earlier this week, there were multiple reports Trump was preparing to fire Fed chair Jerome Powell, with whom he disagrees with for not lowering interest rates. Markets tanked on the news. They then shot back up when Trump denied the report.
Members of the administration are also laying the groundwork for a series of political attacks over the $2.5 billion renovations to the Federal Reserve’s Eccles Building in Washington D.C. Certain White House officials said they believe the cost overruns on the project and Powell’s testimony about some of the building’s planned design features may amount to mismanagement and cause for termination.
The acrimony—albeit one-sided—between the White House and the Fed adds a new dimension to what might otherwise be ordinary internal policy deliberations.
“Comments coming from Fed officials suggest the Federal Open Markets Committee is cleaving, with a vocal side arguing for rate cuts to begin now, and another side (including Jay Powell) still wanting a delay,” Macquarie global rates strategist Thierry Wizman wrote in a note on Friday. “It could evolve into a split along political lines, with one side swayed by political motives, and the need to accommodate fiscal policy, at the expense of adherence to the price-stability mandate.”
But while politicians like Trump have waded into the Fed—once considered taboo—the central banks officials have not crossed the line themselves. Powell declines to answer all questions about Trump or his policies. On Thursday when Waller was asked if he’d spoken to any White House officials about possibly succeeding Powell, he gave a one word answer: “Nope.”
Williams brushed off the D.C. machinations.
“We’ve got a job to do,” he said.
This story originally appeared on Fortune
