What division inside the Fed means for future interest-rate cuts

Powell views current rates as temporarily elevated to guard against inflation hazards stoked by tariffs

- Nick Timiraos

A brewing debate inside the Federal Reserve over how to address risks posed by President Trump's tariffs threatens to end a period of relative unity, with officials potentially at odds over whether new cost increases justify keeping interest rates high.

In recent weeks, Fed Chair Jerome Powell has indicated the central bank might have a slightly lower bar for cutting rates than seemed possible this spring, when larger tariff increases threatened to meaningfully push up prices while weakening the economy.

A rate cut isn't expected this month. Instead, Powell has sketched out a middle ground where milder-than-expected price readings or softer employment data might be enough to justify cuts by the end of the summer—a lower threshold than more obvious signs of deterioration the Fed might have required when larger tariff hikes prompted forecasts of more sharp inflation increases.

Trump's announcements of larger-than-expected tariff increases in April derailed Fed plans to resume rate cuts this year by creating concerns around a stagflation scenario, in which growth weakens and prices rise. In that environment, Fed officials would have likely needed to see the economy slow to have more confidence that price increases would be short-lived.