MNI: FOMC Fears Tariff Inflation, Split On Rate Path- Minutes

Federal Reserve policymakers worried at last month's policy meeting that tariffs will boost prices pressures, minutes released Wednesday showed, after they decided to keep interest rates on hold for a fourth time and FOMC forecasts showed a median projection of two rate cuts for 2025. 

 

A closer look at the Summary of Economic Projections revealed a fairly sharp divergence among policymakers, and this was reflected in the minutes, which also included extensive discussion of the probable effect of tariff and immigration policies.  

 

"Most participants assessed that some reduction in the target range for the federal funds rate this year would likely be appropriate," the report said. "A couple of participants noted that, if the data evolve in line with their expectations, they would be open to considering a reduction in the target range for the policy rate as 
soon as at the next meeting."

 

At the same time, "some participants saw the most likely appropriate path of monetary policy as involving no reductions in the target range for the federal funds rate this year."

 

"Most participants noted the risk that tariffs could have more persistent effects on inflation, and some highlighted the fact that such persistence could also affect inflation expectations." the minutes added.

 

The June SEP showed FOMC members expect higher inflation and slower economic growth, likely because of tariffs. The Fed's official rate target range has remained at 4.25-4.5% since December as officials weigh the likely effect of policy uncertainty from Washington. 

 

"Several participants commented that the current range for the federal funds rate may not be far above its neutral level," according to the minutes. 

The minutes come against the backdrop of a heated search for Jerome Powell's successor in the role of Fed chair, and amid persistent pressure from the White House on the central bank to lower interest rates. President Donald Trump has explicitly tied the idea of lower interest cost financing for U.S. Treasury debt, potentially enmeshing the Fed in areas of fiscal policy it would prefer to avoid. 

 

Trump this week extended deadlines for trade deal negotiations with key U.S. partners, once again raising the effective tariff rate for the time being to near the levels where they stood after the original announcement of the April 2 tariffs, which led to a sharp market pullback. 

 

This time, investors appear to be taking the bluster in stride, hoping that it is simply an ongoing negotiating tactic that eventually leads to some kind of backing down. 

 

Last week's employment report showed a healthy gain of 147,000 jobs in June while the jobless rate fell to 4.1%. "In their outlook for the labor market, most participants suggested that higher tariffs or heightened policy uncertainty would weigh on labor demand, and many participants expected a gradual softening of conditions," the Fed said.