Two Federal Reserve governors advocated for a reduction in interest rates, a move that hasn't been suggested by dissenting governors in three decades, providing the following reasoning:
The Federal Reserve kept its key interest rate steady for the fifth consecutive meeting, but two of its governors, Michelle Bowman and Christopher Waller, dissented from the decision. This marks the first time in over 30 years that two governors have disagreed on the rate decision.
Bowman and Waller argue that tariffs are not a significant factor in inflation, viewing tariff-induced price increases as one-time or temporary effects rather than persistent drivers of inflation. They base their view on current economic data, which shows slower growth and a labor market near full employment, implying that the inflationary effects from tariffs are short-lived.
The governors suggest that the Fed should adopt a more accommodative monetary policy to support the economy. They advocate for cuts in interest rates towards a more neutral stance, in contrast to other Fed officials who prefer a cautious approach, monitoring the broader impact of tariffs on inflation before adjusting policy.
The disagreement among policymakers regarding the impact of tariffs on inflation, coupled with rising inflation figures and a weakening labor market, could complicate the Fed's path forward. The Fed's preferred inflation gauge, the PCE index, showed that inflation accelerated in June, rising from 2.3% to 2.6% on an annual basis. Job gains in May and June were revised downward by 258,000, and the economy added just 74,000 jobs in July, significantly below expectations.
Waller, in particular, believes that the "wait and see" approach on the impact of tariffs on inflation is overly cautious and could lead to policy falling behind the curve. He advocates for central banks to "look through" tariffs as one-time increases in the price level that do not cause inflation beyond a temporary increase.
Federal Reserve Chair Jerome Powell acknowledged the dissents and appreciated that they provided clear explanations of their thinking. Despite the disagreement, the Fed decided to keep rates unchanged, with the median FOMC participant estimating the neutral rate to be about 3%, which would imply cuts of 125 to 150-basis-points from the current range.
As the Fed navigates these challenges, the debate on the impact of tariffs on inflation and the appropriate monetary policy response continues to unfold.
- The disagreement among Federal Reserve governors about the impact of tariffs on inflation has complicated the Fed's path forward, as evidenced by the recent decision to keep interest rates steady.
- Michelle Bowman and Christopher Waller argue that tariffs are not significant factors in inflation, and suggest a more accommodative monetary policy to support the economy, including cuts in interest rates.
- The governors' views are based on current economic data, which shows slower growth, a labor market near full employment, and short-lived inflationary effects from tariffs.
- The debate on tariffs' impact on inflation and the appropriate monetary policy response is ongoing and is a significant topic in the general-news, finance, business, politics, and markets.
