Before the July FOMC: Fed Officials Remain Divided — Is Tariff-Driven Inflation or Labor Market Weakness the Bigger Threat?

TradingKey - While the Federal Reserve is widely expected to hold rates steady at its July 30 meeting, internal disagreements among policymakers over the tariff impact on inflation and the deteriorating labor market remain unresolved. As the meeting approaches, hawks and doves are still locked in debate over the timing and urgency of rate cuts.

With just two weeks before the FOMC meeting, several Fed officials voiced their views this week on inflation, employment, and the path forward for monetary policy.

Fed Doves Call for Action

On Thursday, July 17, Christopher Waller, a member of the Federal Reserve Board, said the Fed should cut rates this month to preempt further weakness in the job market.

Waller argued that inflation is near the 2% target, and upside risks to price pressures remain limited — meaning policymakers should not wait for the labor market to visibly deteriorate before easing.

He pointed out that core CPI has underperformed expectations for five consecutive months, and wage growth remains subdued, suggesting that inflation expectations are still well-anchored.

Waller’s stance aligns with that of Governor Michelle Bowman, the only two FOMC members who projected three rate cuts in 2025 at the June meeting. Bowman believes that as long as inflation remains under control, cuts can proceed.

Also on Thursday, Mary Daly, President of the San Francisco Fed, reiterated her view that the Fed should cut rates twice this year — and warned that waiting too long could risk harming the economy.

She said, “If we wait til inflation is 2%, well then we’ve lost, we’ve likely injured the economy in some way that was completely unnecessary.”

She added that businesses are absorbing tariff costs, and consumers are still spending, allowing the Fed to maintain its current stance — for now.

Hawks Warn of Inflation Risks

On the other side of the debate, Raphael Bostic, President of the Atlanta Fed, said in a Wednesday interview that recent inflation data shows rising price pressures, and that policymakers may be at an inflation turning point.

Adriana Kugler, a Fed governor, argued that short-term inflation expectations are rising, and that tariff-driven price increases are now evident in goods prices.

She said maintaining the current restrictive policy stance is necessary to ensure long-term inflation expectations remain anchored.

Market Pricing: July Hold, September Cut in Doubt

As of July 18, markets are pricing in a near-certain rate hold in July (97.4% probability) , with a 56.3% chance of a cut in September — down from over 75% at the start of the month, as concerns over tariff-driven inflation have grown.