The outlook for further interest rate cuts by the Federal Reserve is unclear, as two committee members are hesitant this year, with Bowman and Mulan insisting

The internal divergence within the Federal Reserve regarding further interest rate cuts is deepening. Two Federal Reserve officials with voting rights on the Federal Open Market Committee (FOMC) this year are concerned about aggressive rate cuts, while Vice Chair Michelle Bowman and Governor Stephen Miran advocate for faster cuts.

Kansas City Fed President Jeff Schmid and Chicago Fed President Austan Goolsbee both expressed concerns on Thursday that excessive rate cuts could hinder inflation from returning to the Fed's 2% target. Schmid believes the current policy stance is slightly restrictive and in an appropriate position, while Goolsbee is uneasy about "multiple rate cuts concentrated in the near term," warning of the risk of policy missteps from acting too aggressively.

In contrast, Bowman stated on Thursday that inflation is sufficiently close to the target, and the labor market is weaker than expected, providing justification for further rate cuts. Newly appointed Governor Miran continues to call for significant rate cuts, warning that the current interest rate level of 4% to 4.25% is "highly restrictive," making the economy more susceptible to downside shocks.

This divergence reflects the policy challenges faced by Federal Reserve officials in balancing inflation risks with employment concerns. The Fed just decided to cut rates for the first time this year last week, but there remains significant disagreement over the subsequent rate cut path. The dot plot released after the meeting showed that among the 19 decision-makers, 7 expect no further cuts this year, while 10 anticipate a total cut of at least 50 basis points.

Schmid emphasizes the necessity of moderate policy tightening

In a speech on Thursday in Dallas, Schmid defended last week's rate cut decision but expressed caution about further easing. He said:

"Last week's 25 basis point cut was a reasonable risk management strategy. My view is that inflation levels remain too high, and while the labor market has cooled somewhat, it is still generally balanced in terms of supply and demand."

Schmid explained that while he is concerned about sticky inflation that could rise to 3% rather than fall back to the Fed's target of 2%, recent weak employment market data leads him to believe that the labor market may deteriorate more "substantially or suddenly" than expected.

Schmid emphasized that inflation remains too high, and while the labor market has cooled, it is still largely balanced. He believes the current policy stance is "only slightly restrictive, which is exactly where it should be." Regarding future interest rate adjustments, Schmid stated he would take a "data-dependent approach," closely monitoring inflation and labor market data.

Schmid also stressed the importance of the Fed's independence in bank regulation, arguing that the view of separating these functions from the Fed or placing them under more direct presidential control is "incorrect and could lead to unintended consequences that are not fully considered."

Goolsbee expresses concern over the risk of stagflation re-emerging

Goolsbee expressed unease about aggressive rate cuts in a speech on Thursday in Michigan. He is concerned that rapid rate cuts could hinder inflation from fully returning to target. He specifically mentioned, "I feel somewhat uneasy about multiple rate cuts concentrated in the near term based solely on slowing employment data." Goolsbee said:

"If the environment we are in is that inflation has been above the 2% target for nearly five years and is continuing to worsen, then simply hoping that inflation is temporary (in terms of interest rate cuts) makes me uneasy."

Goolsbee pointed out that the current environment shows signs of stagflationary shocks, which he described as the "worst-case scenario" the Federal Reserve may face in balancing its dual mandate. He stated that if data shows the U.S. economy is on a path to maintaining stable full employment and inflation may fall back to 2%, then interest rates could be significantly lowered from current levels.

Goolsbee noted that the U.S. GDP data released this Thursday did not change his view on growth trends. The Fed's monetary policy is only moderately restrictive. The Fed is uncomfortable with inflation being in the 2%-3% range. While the Fed remains inactive, rising inflation has effects similar to interest rate cuts.

However, Goolsbee also left room for further rate cuts, stating that if economic data supports it and stagflation risks diminish, more cuts could still be implemented. If the data indicates that the U.S. is likely to maintain stable full employment and inflation is expected to return to 2%, he believes that rates could be lowered significantly from current levels.

Goolsbee mentioned that he has not seen tariffs causing second-round price effects. Long-term inflation expectations are anchored, reflecting external confidence in the Fed. Many indicators in the labor market suggest a moderate cooling of employment.

Bowman and Milan Push for Continued Rate Cuts

In stark contrast to the cautious voting members, Federal Reserve Vice Chair Bowman and Governor Milan continued to publicly advocate for more aggressive rate cuts on Thursday.

Bowman reiterated her concerns about the labor market at an event at Georgetown University, pointing out that U.S. inflation is close enough to the Fed's target, but the labor market is more "fragile" than expected. She emphasized that the inflation rate is "within" the Fed's target range and believes that the impact of tariffs on price increases may be one-time.

As an official nominated by Trump, Bowman warned decision-makers on Tuesday of the serious risk of "falling behind the curve," stating that since April, job growth has averaged only about 25,000 per month, far below the levels at the beginning of the year. She stated, "It is time for the committee to take decisive, proactive action."

Milan, on the other hand, advocated for immediate and larger rate cuts. He stated on Thursday that the current federal funds rate of 4% to 4.25% is significantly above neutral levels, and "when monetary policy is in such a restrictive position, the economy becomes more vulnerable to downward shocks."

Milan explicitly proposed achieving neutral interest rates through a round of "very brief, 50 basis point cuts," totaling a reduction of 150 to 200 basis points. As the only official to vote against last week's FOMC meeting, he had advocated for a 50 basis point cut instead of 25 basis points. This week, he acknowledged that he was the only one in the dot plot to provide an expectation of a total of 150 basis points of rate cuts this year.

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