A divided Federal Reserve is set to make its first interest rate cut this year, as it faces fierce pressure from US President Donald Trump and a split over whether the weakening jobs market can counter the inflationary risk posed by US tariffs.
Investors widely expect the rate-setting Federal Open Market Committee (FOMC) to lower borrowing costs by a quarter point at Wednesday’s policy vote.
But Jerome Powell could end up caught in the middle – with the Fed chair stuck between governors advocating for bigger cuts and regional Fed presidents who would prefer to keep borrowing costs on hold.
“They’re probably going to get dissents in both directions,” said Vincent Reinhart, a former Fed official who is now chief economist at BNY Investments.
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“The expectation is that monetary policy is a group effort. And having a few on the FOMC disagreeing with the chair suggests that the case for action was insufficiently built.”
The FOMC has not been split three ways since 2019.
Krishna Guha of Evercore ISI said the likelihood of a three-way divide was “a sign of the distinct sort of pressure the committee is under right now”.
“There are new political and institutional pressures that cut across the pure macro debate,” Guha added.
The two-day meeting, which begins on Tuesday, comes amid heightened aggression from the US president.
Trump, who has called on Powell to resign and labelled him a “numbskull” over his reluctance to cut rates, ratcheted up his attacks last month when he tried to fire Fed governor Lisa Cook over allegations of mortgage fraud.
Cook, who has denied the charges, is suing Trump, claiming he does not have the right to dismiss her “for cause”.
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She is set to attend the meeting after a Washington federal court earlier this week granted her the right to remain at the Fed for now – though Trump’s lawyers on Thursday appealed for the decision to be reversed by Monday.
After cutting borrowing costs by 100 basis points last year, the Fed has kept interest rates on hold at a 4.25-4.5 per cent range since December.
The expected dovish tilt from the Fed comes after Powell said in Jackson Hole last month that a downturn in the jobs market would probably prove enough to stop Trump’s tariffs leading to broader price pressures.
While Powell believes any impact from tariffs on prices will prove a one-off shock that the Fed can afford to look through, some presidents of the regional Fed banks – including Chicago Fed chair Austan Goolsbee, Kansas City Fed head Jeff Schmid and Alberto Musalem of the St Louis branch – are unconvinced.
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They argue that inflation indices are still edging up and are yet to fully reflect the impact of trade policies, while the unemployment rate, at 4.3 per cent, remains low.
Some think Powell might be able to convince the hawks to back him.
Derek Tang, an analyst at LHMeyer, said Powell could strike a “grand bargain” by indicating a higher bar for future rate cuts, should they vote with the Fed chair at this meeting.
Guha said that from a political perspective Powell might benefit from a hawkish dissent. “It balances the pressure a little bit from Trump – and the Trump appointees – to cut more aggressively.”
Fed governor Christopher Waller, who is a leading contender to replace Powell as chair next May, could view recent jobs data as troubling enough to warrant a jumbo 50 basis point cut.
Initial jobless claims this week rose at their highest level since 2021, while the most recent non-farm payrolls report revealed the first monthly job losses since the coronavirus pandemic.
Another ally of the president, Stephen Miran, could back a move of 50 basis points or more, should he be confirmed for a Fed governor role by the Senate in time for the September vote.
The bar for a more aggressive cut is higher for Michelle Bowman, despite the Fed governor backing Waller’s call for a 25 basis point cut at the July vote. But if Bowman, who is also on the shortlist of possible replacements for Powell, did support a bigger cut it would mark the first time that three governors have not voted with the chair since 1988.
The uncertain economic backdrop and febrile political climate could also create disparity in the Fed’s message on what comes next.
The FOMC will release its latest quarterly projections – outlining what its 19 voting and non-voting members think will happen to growth, inflation, unemployment and interest rates – after the meeting concludes.
“The moderates and hawks on the committee will likely be cautious about committing to an easing path given the inflation situation,” said Michael Feroli at JPMorgan.
Reinhart said: “The economic projections are going to be as spread out as we’ve seen. The dot-plots are this big blank canvas that they fill with different intentions ... we’re getting to splatter-painting here.” - Copyright The Financial Times Limited 2025
