– FOMC Vice Chair Williams: ‘Modestly Restrictive’ Policy ‘Entirely Appropriate’
– Kugler, Collins, Logan, Hammack, Daly Also Back Delaying Monetary Easing
By Steven K. Beckner
(MaceNews) – Unfazed by White House pressure, Federal Reserve officials have reasserted their intention to take a cautious and deliberate approach to considering additional interest rate reductions cuts this week.
Notwithstanding intensifying demands and threats from President Trump, Fed officials generally have stood by embattled Chair Jerome Powell. They have offered little hope that the Fed’s policymaking Federal Open Market Committee will ease monetary policy as it approaches its late July meeting.
Though divided, it seems sure the FOMC will not be ready to cut the federal funds rate at the conclusion of its July 29-30 gathering, based on comments from an array of officials over the past several days.
In recent weeks, Trump has steadily escalated pressure on the Fed, going from urging sharp rate cuts, to personally insulting Powell, to demanding his resignation, to threatening to fire him “for cause” because of cost overruns on renovation of the Fed’s Washington, D.C., headquarters.
But Fed officials showed no sign of buckling this week with the FOMC meeting just two weeks away. Their common theme was that uncertainty about economic risks is too great to justify changing monetary policy and that low unemployment permits policy to stay firm until the impact of tariff increases on inflation becomes more clear.
Citing continued elevated inflation and labor market resilience, Cleveland Fed President Beth Hammack made clear she’s in no mood to cut rates as soon as July 30 in a Monday interview with Fox Business.
Seemingly bolstering the case for standing pat, a Tuesday morning Labor Department report showed a June re-acceleration of inflation, as the impact of tariff hikes began to be felt.
Hours after that report was released, Boston Fed President Susan Collins said the Fed should “take its time” and pursue an “actively patient approach “
Later Tuesday, Dallas Federal Reserve Bank President Lorie Logan said her “base case” is that monetary policy “needs to hold tight for a while longer,” although she presented an alternative scenario in which interest rates might need to be lowered “fairly soon.”
New York Fed President John Williams, a top Powell lieutenant, said Wednesday evening it is “entirely appropriate” to maintain what he called a “modestly restrictive stance” while the FOMC continues to evaluate the impact of tariffs on the economy and inflation.
Fed Governor Adriana Kugler said Thursday a lack of sufficient progress against inflation means the Fed should keep rates where they are “for some time.”
San Francisco Fed President Mary Daly was a little more cagey Thursday afternoon, saying the most important question is not the exact date of rate cuts but the ultimate rate level. She called two 25 basis point rate cuts this year “a reasonable outlook,” but declined to say whether they will begin in July or September.
Daly said the FOMC would risk hurting the economy if it waits too long to cut rate but stopped well short of explicitly opening the door to a July cut, as two of her colleagues have done. On the contrary, she seemed to suggest a later time frame by echoing Powell in saying policy is now “in a good place.”’
When the FOMC last gathered June 17-18, it held the funds rate steady in a target range of 4.25% to 4.5% for a fourth straight meeting after lowering it by 100 basis points over the last three meetings of 2024.
In their revised, quarterly Summary of Economic Projections, the 19 FOMC participants again projected that by year’s end, the funds rate will be at a median 3.9% (a target range of 3.75% to 4.0%), implying two 25 basis point rate cuts sometime during the remainder of 2025.
But the Committee was sharply divided, as made clear in the minutes of the July meeting.
“Most participants assessed that some reduction in the target range for the federal funds rate this year would likely be appropriate, noting that upward pressure on inflation from tariffs may be temporary or modest, that medium- and longer-term inflation expectations had remained well anchored, or that some weakening of economic activity and labor market conditions could occur,” they disclosed.
However, the minutes also say “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, noting that recent inflation readings had continued to exceed the Committee’s 2% goal, that upside risks to inflation remained meaningful in light of factors such as elevated short-term inflation expectations of businesses and households, or that they expected that the economy would remain resilient.”
Fully seven FOMC participants foresaw no 2025 rate cuts.
On the other hand, the minutes revealed, “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.” Those two officials self-identified as Fed Governors Michelle Bowman and Christopher Waller.
Powell has been publicly mum since a July 1 appearance at a European Central Bank Forum on Central Banking, when he said, “We think the prudent thing to do is to wait and learn more and see what those effects might be.”
Powell’s colleagues have not been marching in lockstep but have largely supported their chair.
Hammack was the first to quash rate cut hopes on Monday with an interview on Fox Business, saying, “We’re pretty close to where the neutral rate is and so I see an economy that’s resilient, I see one that’s working really well, and I don’t see a need to really reduce (interest rates) unless we see material weakening on the labor side.”
Hammack added, “From where I sit and what I see, what I see is that we’re hitting on our employment side of the mandate, we’re not there yet on the inflation side of the mandate, “I think it’s important for us to maintain a restrictive posture of monetary policy to make sure that we’re getting inflation down to our target of 2%.”
Collins said she expects some slowing of economic growth and softening of labor markets , but also foresaw some increased inflation in remarks to the National Association for Business Economics – leaving her in a stationary policy position.
“While the extent of the increase remains uncertain, it seems likely that core PCE inflation will be in the vicinity of 3% by year’s end, before resuming its decline,” she said. “Concerning the labor market side of our mandate, tariffs should slow demand and hiring, though not necessarily by a large amount.
Collins did “not rule out scenarios with larger or more persistent effects from tariffs and ongoing economic uncertainty, as well as scenarios in which the effects are more muted.”
She said “the outlook, which is clouded by significant uncertainty. Indeed, it seems likely that the economy will move away, at least temporarily, from the favorable conditions” currently prevailing.
This uncertainty left Collins hesitant to change monetary policy. “Calibrating appropriate policy in this context is challenging,” she said. “However, continued overall solid economic conditions enable the Fed to take the time to carefully assess the wide range of incoming data.”
“Thus, in my view, an “actively patient” approach to monetary policy remains appropriate at this time,” Collins added.
Elaborating in response to a question about the Fed’s dual mandate, Collins said, “At the moment the risk of higher inflation requires tighter monetary policy for longer,” but if the economy weakens that would require “easing faster.“
Logan, usually thought of as being one of the more “hawkish” Bank presidents, saw no immediate need for monetary easing in a Tuesday evening speech to the World Affairs Council of San Antonio.
She began by calling the labor market “solid” and by looking askance at recent inflation data, saying she’d “like to see low inflation continue longer to be convinced.”
Given those two realities, Logan said her “base case is that we’ll need to keep interest rates modestly restrictive for some time to complete the work of returning inflation sustainably to the 2% target.”
But she added, “it’s also possible that some combination of softer inflation and a weakening labor market will call for lower rates fairly soon.”
Explaining her “base case” scenario, she said tariff increases “appear likely to create additional pressure for some time,” but added, “we have more ground to cover to achieve our long-run inflation goal.”
As for economic growth and employment, Logan said, “While consumer spending has stepped down from last year’s very strong pace, the solid labor market means household incomes are holding up.”
“All this adds up, for me, to a base case in which monetary policy needs to hold tight for a while longer to bring inflation sustainably back to target — and in this base case, we can sustain maximum employment even with modestly restrictive policy,” she said.
In her second “plausible” scenario, Logan said, “inflation could turn out to be less persistent and less responsive to tariffs,” and “economic activity could worsen….”
“Outcomes along any of these lines could shift the inflation and employment outlook and call for reducing interest rates sooner than in my base case,” she warned.
Logan said the FOMC will “have to balance a wide range of risks” before deciding what to do with its rate settings.
“For now, I believe monetary policy is well positioned to achieve the FOMC’s goals of maximum employment and price stability and to respond appropriately as the outlook changes,” she said.
Williams, the FOMC vice chairman, echoed Powell in saying “the U.S. economy remains in a good place” with a “solid” labor market and inflation “on a gradual, albeit bumpy downward path toward our 2% longer-run goal.”
But he too was wary about how tariffs and other developments could affect the economy going forward and hence was unwilling to commit to a looser policy stance.
“All in all, although we are only seeing relatively modest effects of tariffs in the hard aggregate data so far, I expect those effects to increase in coming months.” he told the New York Association for Business Economics, “Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year.”
What’s more, Williams warned, “Another element to the inflation outlook is that the lower foreign exchange value of the dollar we have seen this year likely will add somewhat to inflationary pressure going forward.”
So, he said he intends to “be vigilant and monitor prices and broad movements over time to best assess evolving conditions.”
Therefore, Williams declared, “Maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals. It allows for time to closely analyze incoming data, assess the evolving outlook, and evaluate the balance of risks to achieving our dual mandate goals.”
Williams said he expects real GDP growth to slow to just 1% this year and for unemployment to rise to 4 ½%, but suggested such a slowdown wouldn’t necessarily justify lower rates, because he also “anticipate(s) inflation will come in between 3 and 3-1/2% in 2025, and then fall back to about 2-1/2% next year before reaching 2% in 2027.”
The hawkish refrain continued Thursday, with Kugler complaining that “both headline and core inflation have shown no progress in the last six months,” while calling the economy “resilient” and the labor market “stable and close to full employment.”
“I see upward pressure on inflation from trade policies, and I expect additional price increases later in the year,” she said at a Washington housing symposium.
Hence, Kugler, whose term as governor ends in January, echoed her colleagues in calling for no near term rate cuts. “Given the stability in the employment side of our mandate, with the unemployment rate still at historically low levels, elevated short-run inflation expectations, and goods inflation rising due to the upward pressure from tariffs, I find it appropriate to hold our policy rate at the current level for some time.”
“This still-restrictive policy stance is important to keep longer-run inflation expectations anchored. Moving forward,” she added.
Daly largely concurred Thursday afternoon, although she was reluctant to make odds on a July 30 versus a Sept. 17 initial rate cut.
Asked about the chances of a July move at the 2025 Rocky Mountain Economic Summit in Victor, Idaho, Daly responded by saying that asking whether the FOMC will cut rates in July or Sepbember is “asking the wrong question.”
The more import ant question is “the direction of travel,” she said, adding that “the direction of travel is that rates will be reduced with the fact that inflation is coming down and we don’t want to unnecessarily unnecessarily slow the economy.”
Daly described herself as “cautiously optimistic” about the economy and said she has found the same mood among business people in her sprawling 12th district.
She said the Fed is “really close” to fulfilling its dual mandate. “We have an economy that’s working, with solid growth, a solid labor market…consumers are spending.”
But Daly added, “ultimately what’s still bothersome is that we haven’t achieved price stability.….We still have some work to do. We’re in a good place, but we need to finish the job.”
However, Daly emphasized several times that the FOMC can’t “wait forever” to cut rates. “If we wait until inflation gets to 2% we’ve lost,” because the economy will have been damaged by keeping rates too low for too long.
But Daly also indicated she does not see a need for rates to be reduced nearly as much as Trump, who has called for 300 basis points of cuts. She said the 50 basis points of 2025 cuts contained in the June SEP is “a reasonable outlook to have.”
Beyond that, she suggested that not a lot of additional rate cuts are needed, relative to her conception of the “neutral” rate.
Daly estimated the neutral rate to be at least 3%, which she says leaves the current funds rate only “a little restrictive.” If the neutral rate were lower, the economy wouldn’t be doing as well as it is, she contended.
But again, Daly stressed, “we can’t wait forever” to start making policy less restrictive. “We can’t wait until we know (inflation is at 2%) or we’ll be backward looking. Then it’s too late.”
She sounded more hopeful than many about an adverse tariff influence on inflation, saying that, “so far, we haven’t seen that as a pervasive outcome.”
“We might end up with more muted impact of tariffs than we thought,” Daly said.
As Williams and others have suggested, economic data have not made a compelling case for rate cuts lately. Although there have been signs of cooling in the labor market, non-farm payrolls grew by 147,000 in June, while the unemployment rate fell to 4.1%, instead of rising to 4.3% a feared.
On the inflation side of the Fed’s dual mandate, the Labor Department reported that its Consumer Price Index increased 2.7% last month from a year ago, up from 2.4% in May. The core CPI was up 2.9%, up from 2.8%. More consoling was Wednesday’s report on the Producer Price Index, which showed wholesale prices unchanged last month (up 2.3% from a year earlier).
Adding to consternation at the Fed and on Wall Street has been President Trump not-so-veiled threats to the central bank’s independence.
The Trump administration has steadily escalated pressure on the Fed, going from urging sharp rate cuts to personally insulting Powell to demanding his resignation to openly talking about removing him on the grounds of cost overruns on renovation of the Fed’s Washington, D.C. headquarters.
Speculation has mounted that Powell will be pushed out and replaced by Kevin Hassett, director of the White House National Economic Council, or by former Fed Governor Kevin Warsh. Treasury Secretary Scott Bessent and Fed Governor Christopher Waller are also said to be under consideration.
Traditionally, the FOMC has followed the lead of the chair, but merely by replacing Powell, Trump would not necessarily get his way. As Richmond Fed President Tom Barkin and Sen. Tom Tillis, R-NC noted this week, the 12-member Committee does not have to vote how the chair wants them to vote, whoever that might be.