Fed Governor Bowman Advocates July Rate Cut Amid Tariff Inflation Concerns

Federal Reserve Governor Michelle Bowman has suggested that the central bank should consider reducing its key interest rate at its upcoming meeting in July. This recommendation comes amidst growing divisions among Fed officials and intense criticism from the White House. Bowman's stance is based on the observation that President Donald Trump’s tariffs have not yet caused the anticipated surge in inflation, and any future price increases are likely to be temporary.

In a speech delivered in Prague, Bowman stated, “It is likely that the impact of tariffs on inflation may take longer, be more delayed, and have a smaller effect than initially expected.” She further added, “Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting,” scheduled for July 29-30. Bowman, appointed to the Fed’s board of governors by Donald Trump in 2018, is the second high-profile official to advocate for a potential July rate cut within a short span of time. Earlier, Christopher Waller, another Trump appointee, had expressed similar views in a television interview.

These calls for rate cuts contrast with Fed Chair Jerome Powell’s more cautious approach. Powell had indicated that the central bank would monitor the economy over the summer and assess inflation responses to tariffs before deciding on any rate reductions. The differing opinions highlight the internal debates within the Fed regarding the appropriate monetary policy response to current economic conditions.

Bowman’s remarks come at a time when Trump has been vocal in his criticism of Powell, accusing him of not cutting rates and labeling him a “numbskull” and a “fool.” Trump’s comments have raised concerns about the Fed’s independence from political influence. The president argues that Fed rate cuts would lower the government’s borrowing costs, although market forces, not the Fed, primarily determine these rates.

Bowman downplayed the potential negative impact of tariffs on the economy, asserting that small and one-off price increases this year would have minimal effects on real economic activity. She also expressed optimism that less restrictive regulations, lower business taxes, and a more favorable business environment would boost supply and offset any adverse effects on economic activity and prices.

When the Fed lowers its short-term interest rate, it typically reduces borrowing costs for mortgages, auto loans, and business loans. However, financial markets sometimes keep longer-term rates higher, as seen last year when the Fed cut its rate by a full percentage point to about 4.3%, but mortgage rates only declined slightly.

Waller, in his interview, highlighted rising unemployment among recent college graduates as a sign of potential economic weakening. He advocated for a proactive approach to rate cuts, suggesting that the Fed should consider reducing rates before the labor market deteriorates further. “I’m all in favor of saying maybe we should start thinking about cutting the policy rate at the next meeting, because we don’t want to wait until the job market tanks before we start cutting,” Waller said.

Despite these calls for rate cuts, a significant number of Fed officials remain cautious. At the last Fed meeting, seven out of 19 officials who participate in interest-rate decisions supported keeping rates unchanged for the rest of the year, while two suggested just one cut. Inflation has shown signs of cooling this year, with the consumer price index rising only 0.1% from April to May, indicating muted price pressures. Prices for some goods increased, but the cost of many services, such as air fares and hotels, fell, offsetting any tariff impact.

Compared with a year ago, prices rose 2.4% in May, up from 2.3% in April. Trump has implemented various tariffs, including a 10% duty on all imports, a 30% levy on goods from China, a 50% levy on steel and aluminum, and a 25% levy on autos. Many economists predict that tariffs could push inflation higher in the coming months. Fed Chair Jerome Powell has indicated that the central bank will closely monitor inflation trends over the next few months before deciding on any rate cuts. Mary Daly, president of the Fed’s San Francisco branch, also suggested that a rate cut might be more appropriate in the fall.