Fed officials split over how to read economic signals

Federal Reserve officials, meeting in Washington last month, concluded that the combination of low unemployment and still-elevated inflation meant they should delay cutting interest rates, at least for now.

Not all of them agreed, underscoring the challenge for Jerome H. Powell, the Fed's chair, to forge a consensus across policymakers at forthcoming meetings.

A record of the central bank's July 29-30 meeting, released Wednesday, showed a divided Fed grappling with conflicting signals from the economic data, and how to respond to them.

Policymakers "generally expected inflation to increase in the near term," the minutes showed, but they disagreed about whether that would be a short-term increase as companies passed along the cost of tariffs, or could morph into a more persistent problem.

They agreed that job growth has slowed, but not about what that slowdown meant for the economy. Most important, they were divided about how to weigh the conflicting risks of higher inflation and rising joblessness.

"A majority of participants judged the upside risk to inflation as the greater of these two risks," the minutes showed, "while several participants viewed the two risks as roughly balanced, and a couple of participants considered downside risk to employment the more salient risk."

Ultimately, policymakers decided to hold rates steady for the fifth meeting in a row. But it was one of the most hotly contested monetary policy votes in decades, with two members of the Board of Governors officially opposing the decision to hold borrowing costs steady. It was the first double dissent on such a vote from policymakers of that rank since 1993.

The meeting took place amid intense pressure from President Donald Trump to cut interest rates, despite laws that are meant to insulate the central bank from political influence. Trump has repeatedly threatened to fire Powell and has seized on cost overruns in the central bank's headquarters-renovation project as a potential pretext for doing so.

On Wednesday, Trump started a new assault, this time targeting Lisa Cook, a Fed governor.

He called on her to resign after Bill Pulte, the director of the Federal Housing Finance Agency, said on social media that his office had investigated Cook and found that she appeared to have falsified bank documents to obtain favorable loan terms.

Cook released a statement Wednesday evening saying she had "no intention of being bullied to step down."

Powell and other Fed officials have tried to project an appearance of normalcy amid the attacks, emphasizing that their policy decisions will depend on the state of the economy, not political pressure. The minutes of the July meeting contain no reference to Trump's threats.

Instead, the debate inside the central bank focused on questions related to inflation and the labor market. Most Fed officials are wary of cutting interest rates too soon because inflation remains above their long-run target of 2%, and it is likely to rise further as a result of Trump's tariffs.

They worry that another sharp rise in prices, so soon after the surge that followed the COVID-19 pandemic, could lead consumers and businesses to begin expecting faster inflation in the future, making it more difficult for policymakers to bring it fully under control.

And while Fed officials are watching the labor market warily for signs of cracks, most of them still believed in July that they could afford to wait on rate cuts because the unemployment rate remained low.

"Some participants emphasized that a great deal could be learned in coming months from incoming data, helping to inform their assessment of the balance of risks," the minutes showed. Although others "noted that it would not be feasible or appropriate to wait for complete clarity on the tariffs' effects on inflation" before cutting rates.

The two dissenters, Christopher J. Waller and Michelle W. Bowman - both of whom were appointed by Trump in his first term - saw things differently. They argued that a fragile labor market called for the central bank to take preemptive action to support it and that inflationary pressures tied to tariffs would ultimately prove to be temporary.

Just days later, their warnings about the labor market looked prescient. Data released on Aug. 1 showed much more lackluster monthly jobs growth this spring and summer than was previously reported despite the unemployment rate staying relatively stable around 4.2%.

But the downbeat jobs report was followed shortly thereafter by new inflation data that showed a worrying acceleration in underlying inflation in July even as the tariff impact on consumer prices overall was less than initially feared.

That combination presents a challenge for the Fed, which is meant to keep inflation low and stable and ensure the labor market is robust. The recent signs of deterioration in the labor market appear to have made it more likely that officials will lower interest rates at their next meeting, in mid-September.

But the pace of cuts beyond the first move will largely hinge on how the data evolves. The July minutes showed that several officials thought that the Fed's main interest rate "may not be far above its neutral level" - central bank jargon for the level at which monetary policy is neither stimulating economic growth nor reining it in.

That suggests that even once the Fed starts cutting rates again, it may do so only gradually.

The minutes from the July meeting were released just days before Powell is expected to speak at the central bank's annual gathering of leading economic policymakers in Jackson, Wyoming.

His speech, which is scheduled for Friday morning, is his most closely-watched of the year and is typically used to send important signals about the economic outlook and the path forward for monetary policy.

Powell is unlikely to explicitly commit to a September cut, given that there is another round of economic data between now and the next vote. But, he is expected to lay out the case for reducing borrowing costs.

This article originally appeared in The New York Times.