Fed's Internal Divisions Deepen? Powell Exercises Caution Amid Uncertainty

TradingKey - On Wednesday, June 18th, the Federal Reserve opted to hold rates steady, marking the fourth consecutive pause in its rate-cutting cycle. The benchmark federal funds rate remains in the range of 4.25% to 4.5%. However, the release of the latest dot plot indicates growing divisions within the Fed.

While the 19 members of the Federal Open Market Committee (FOMC) collectively anticipate a total rate cut of 50 basis points this year, only 10 members predict at least two rate cuts, a slim majority. Meanwhile, those who believe there will be no rate cuts this year have increased from four in March to seven.

These emerging factions suggest the Fed's current predicament amid the multiple uncertainties surrounding tariff policies, geopolitical tensions, and inflation.

During the press conference, Fed Chair Jerome Powell stated, “We are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” yet he also conveyed his concern over the unpredictable nature of future developments, acknowledging, “I don’t know what the right way for us to react will be.”

Nick Timiraos, often referred to as the “Fed whisperer,” reflects on this dilemma: Despite some easing in inflation, upcoming tariff policies could drive it higher, and while employment shows signs of weakness, the unemployment rate remains low at 4.2%.

The ambiguous economic signals have led the Fed to adopt a “wait-and-see” approach, driven both by the inherent uncertainty of tariff policies and the unclear impact these tariffs have on prices.

In the latest Summary of Economic Projections (SEP), the Fed has downgraded its forecast for GDP growth this year while revising up expectations for inflation and unemployment rates.

Typically, rising inflation would warrant an interest rate hike, whereas slowing economic growth and weak employment would call for rate cuts to stimulate the economy. The current economic projections highlight a “stagflation” scenario, potentially exacerbating internal Fed divisions.

Timiraos notes that the Fed remains open to rate cuts in the latter half of the year. For the Fed to resume rate cuts, signs of labor market weakness or clear evidence that tariff-induced price increases are becoming relatively mild would be necessary.

He remarked that if forecasts of tariff-driven price hikes prove to be "much ado about nothing," the Fed might cut rates sooner. However, should tariffs elevate inflation as predicted, the Fed will face a difficult choice between curbing inflation and maintaining employment stability.