Fed Officials Still Pursuing Monetary Policy ‘Patience’ in Face of Trade Uncertainty

– Some Talk of Eventual Rate Cuts; Others More Reticent

By Steven K. Beckner

(MaceNews) – Federal Reserve officials have continued this week to express caution about changing monetary policy from the “moderately restrictive” stance it has been in since the Fed completed 100 basis points worth of short-term interest rate cuts in December.

President Trump has been leaning heavily on Fed Chair Jerome Powell to cut the federal funds rate immediately, but neither he nor any of his Fed colleagues have given any sign of bending to that pressure.

Some officials sound more inclined to lean toward eventual rate cut, but the general consensus is that, for the foreseeable future, the economic outlook remains much too uncertain to consider rate cuts until greater “clarity” is gained about the impact of tariff, fiscal and other policy changes emanating from the Trump administration and Congress.

Divergences have emerged among policymakers, as reported last week. Some, such as Chicago Federal Reserve Bank President Austan Goolsbee and Fed Gov. Christopher Walker, seem more willing to entertain a resumption of rate cuts later this year in the belief that tariff effects on inflation will not be large or lasting. Others are more concerned about the persistence of elevated inflation and the risks of rising inflation expectations.

But these nuances of difference are largely mute for the time being, as all endeavor to make sense of the economic outlook amid immense uncertainty about non-monetary policies.

On Tuesday, Goolsbee, a voting member of the Fed’s policy-making Federal Open Market Committee, said that once trade-related uncertainties clear up, rates could go “a fair bit below where they are today,” but in the meantime, he said the economy is on a “stagflationary” trajectory, for which the Fed has no “automatic playbook.”

Fed Governor Lisa Cook was ambivalent about how monetary policy might unfold Tuesday, saying tariffs have imposed “an uncertainty tax” on the economy and, by implication, the Fed.

She said risks have risen for both inflation and unemployment and said she and other FOMC voters “will need to carefully balance” the two before deciding how to adjust policy.

Different policy paths, including rate hikes, are “possible,” she added.

Atlanta Fed President Raphael Bostic called the economy “broadly healthy” in an essay released by his bank on Tuesday, but expressed concern about disinflation “stalling.” And, with “heightened uncertainty” about how trade and other policy changes will affects employment and inflation, he urged “patience” on changing monetary policy.

Also Tuesday, Dallas Fed President Lorie Logan advocated focusing primarily on inflation, not unemployment as a long-term monetary strategy.

When the FOMC meets again June 17-18, participants will be revising their quarterly Summary of Economic Projections, including its “dot plot” of funds rate projections. Fed watchers are eager to see how much, if any, easing Fed officials expect to do this year. In their March SEP, the 19 FOMC participants foresaw two 25 basis point rate cuts, projecting a median funds rate of 3.9% (4.75 – 5.0%) by the end of 2025. They projected the funds rate would then fall to 3.4% in 2026 and 3.1% in 2027.

At its lasting meeting on May 7, the FOMC voted unanimously to leave the funds rate unchanged in a target range of 4.25% to 4.5% for the third straight meeting. Although it again described economic activity and labor markets as “solid,” the FOMC cited “further” increases in uncertainty and made a key shift in its policy language, declaring, “the risks of higher unemployment and higher inflation have risen.” Powell warned, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”

For now, “the economy is growing at a solid pace, the labor market appears to be solid. Inflation is running a bit above 2%. So, it’s an economy that’s been resilient and in good shape….”  Powell told reporters. “And so, we think that leaves us in a good place to wait and see. We don’t think we need to be in a hurry. We think we can be patient.”

Since then, multiple Fed officials have continued to speak in that “patient,” unhurried mode, as they did again this week.

Goolsbee has been maintaining that underlying, pre-tariff economic trends – a combination of relatively low unemployment and disinflation – remain intact and that, once tariff tensions are resolved, the Fed should be able to get back to making monetary policy less restrictive.

On Monday, he said tariffs had kicked up “dirt in the air,” but added, “I still think underneath there we basically are on that path” to lower rates. “If we can get past this bumpy period that the dual mandate still looks pretty good to me.”

Goolsbee continued in that vein when speaking Tuesday at the Corridor Business Journal event in Cedar Rapids, Iowa.

Echoing the May FOMC statement, he said the economy is moving in “a stagflationary direction.” in which “employment goes down, prices go up from tariffs.” In that situation, he said “there’s not an automatic playbook of what does the central bank do if both sides get worse at the same time.”

But Goolsbee reiterated that once the “dirt in the air” clears and the economy returns to its pre-trade war trend, rates should be able to go “a fair bit below where they are today.” He was quick to add that “with the uncertainty, I can’t express that with too much confidence.”

Cook too sounded cautiously optimistic about the economy’s ultimate path but was less willing to talk about a return to rate cuts, although she didn’t rule that out.

“The U.S. economy is still on a firm footing, but uncertainty has notably increased since the beginning of the year,” she said in remarks prepared for delivery to the Council on Foreign Relations. “The latest data indicate that unemployment continues to be low, while inflation remains somewhat above the (FOMC’s) 2% goal.”

However, Cook said trade policy changes “appear to be increasing the likelihood of both higher inflation and labor–market cooling.”

“In this environment, monetary policy will need to carefully balance our dual-mandate goals of price stability and maximum employment,” she continued, adding that the FOMC “must consider a range of possible scenarios about the state of the economy.”

Asked whether the FOMC might even need to raise the funds rate, Cook replied, “We have to be open to all possibilities .… We don’t know how tariffs are going to play out, (so) all three scenarios could be possible – cutting, staying or hiking .…”

Like many of her colleagues, Cook stressed the importance of holding down inflation expectations.

“One-year inflation expectations have risen sharply this year,” she noted. “So far, most measures of longer-term inflation expectations have moved less significantly,” but “I will continue to monitor these data carefully.”

Cook suggested the FOMC will have a tough time deciding how to set rates in coming months. “While the economy remains solid, the economic environment could become highly challenging for monetary policymakers,” because “trade policy changes and the response of financial markets, firms, and consumers suggest risks to both sides of our dual mandate.”

Even so, she echoed Powell in saying “the current stance of monetary policy is well positioned to respond to a range of potential developments.

Bostic, a non-voter this year, has recently said he foresees no more than one rate cut this year. If anything, he was even more restrained in an essay published Tuesday by the Atlanta Fed.

Bostic wrote that ‘the macro-economy is reasonably strong overall as uncertainty persists. Inflation remains somewhat above the (FOMC’s) 2% target, while the labor market shows signs of slowing but is still broadly stable.”

But in addition to trade policy, he said “fiscal, tax, and regulatory policy are all likely to see big changes in the coming months.”

Although “the labor market still appears broadly healthy,” Bostic said “there are some indications of potential weakness.” At the same time, he said “progress in lowering price increases mostly stalled.”

Bostic said Fed policymakers will have to ask themselves: “if tariffs do spur price increases, will it be a one-time bump or the start of a more protracted inflationary episode? If the first, then monetary policy can likely look past it. If it’s the second, then there is a risk that inflation and higher inflation expectations could get entrenched in a more enduring way, which could warrant a policy response.”

“There is a great deal of uncertainty out there, making it quite difficult to forecast the economy with confidence,” he continued. “Given that, I continue to believe the best approach for monetary policy is patience.”

“As the economy remains broadly healthy, we have space to wait and see how the heightened uncertainty affects employment and prices, Bostic went on. “So, I am in no hurry to adjust our policy stance.”

Later Tuesday, Logan focused more broadly on the need to curb inflation in a Fed Listens event on the Fed’s “framework’ review in El Paso, Texas.

“We are now in a higher-rate environment, and the post-pandemic experience provides ample evidence of the potential for inflation to surge far above target,” she said in her text, adding that “it seems more appropriate to me to focus on achieving our inflation target going forward, rather than trying to make up for past shortfalls of inflation.”

“In the labor market, I am inclined to pay more attention to increases of employment above the maximum sustainable level, not just shortfalls from that level,” she added.

Logan contended that “to have a sustainably strong economy, a central bank has to make

decisions with the long run in mind.”

“In the short run, a central bank could juice employment by cutting interest rates,” she continued. “People might enjoy that for a little while, but over time, excessive rate cuts would trigger a spiral of inflation. And those rising prices would wipe out whatever temporary benefits people experienced from a hot labor market.”

These Tuesday comments come on the heels of similar remarks earlier in the week.

On Sunday, Gov. Christopher Waller looked forward to potential rate cuts “later this year,” but only if certain assumptions about tariffs are realized.

As in April, he outlined two possible scenarios: a “large tariff scenario,” in which higher tariffs might push both inflaiton and unemployment to 5%, and a “smaller tariff scenario,’ in which more modest tariffs would have less impact  on both ifnlation an d unemployment. In both scenarios, he assumes “tariff increases would lead to a one-time boost to prices that would temporarily raise inflation, after which inflation would return to its underlying rate.”

“Crucial to this judgment is my assumption that longer-term inflation expectations remain anchored.,” Waller emphasized.

Citing recent progress on trade negotiations, he said his “base case” is now “somewhere in between” those two scenarios,” although he added, “wherever things end up on a continuum between my ‘large’ and ‘smaller’ scenarios, I do expect tariffs will result in an increase in the unemployment rate that will, all else equal, probably linger.”

Waller, who has been mentioned as a potential successor to Powell, sees “the risks of my large tariff scenario having gone down,” although “there is still considerable uncertainty about the ultimate levels, and thus about the impact on the economic outlook,”

“Hard data on the fundamentals of the economy lately has been mostly positive and supportive” of the FOMC’s economic objectives, he continued. “As of today, I see downside risks to economic activity and employment and upside risks to inflation in the second half of 2025, but how these risks evolve is strongly tied to how trade policy evolves.”

Waller is one who is inclined to “look through” tariff-related price increases so long as inflation expectations remain anchored. While expecting tariffs to boost inflation indices in coming months, he “expect(s) the effects on inflation to be temporary….”

At the same time, he noted “a dramatic disparity between household measures of inflation expectations and market-based measures. While the University of Michigan’s consumer sentiment surveys “show that both near- and longer-term inflation expectations have increased strikingly,” he noted, “inflation expectation measures based on prices of nominal versus inflation-adjusted securities have not increased very much.”

But Waller said he’s more inclined to trust market gauges of inflation expectations. “(I)t seems hard to believe that the high inflation expectations we are seeing in consumer surveys will lead to large nominal wage increases and a second-round burst of inflation.”

Using those premises, Waller was hopeful of the FOMC being able to justify monetary easing. “Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2 percent goal, and that the labor market remains solid, I would be supporting “good news” rate cuts later this year.