The outlook for further Fed rate cuts is uncertain; two voting members are hesitant this year, Bowman and Mullan remain firm.

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Internal divisions within the Federal Reserve regarding further interest rate cuts are deepening. Two Fed officials who have voting rights on the FOMC this year are concerned about aggressive rate cuts, while Vice Chair Bowman, responsible for financial regulation, and Governor Miran are pushing for faster rate cuts.

Kansas City Fed President Jeff Schmid and Chicago Fed President Austan Goolsbee both stated on Thursday that they fear excessive rate cuts may hinder inflation from returning to the Fed's 2% target. Schmid believes the current policy stance is slightly restrictive and in the right position, while Goolsbee feels "uneasy about multiple front-loaded cuts," warning that acting aggressively upfront carries the risk of policy mistakes.

In contrast, Michelle Bowman said on Thursday that inflation is close enough to the target and the labor market is more fragile than expected, providing reasons for further rate cuts. The newly appointed Governor Stephen Miran continues to call for significant rate cuts, warning that the current 4% to 4.25% interest rate range is "highly restrictive," making the economy more vulnerable to downside shocks.

This division reflects the policy challenges facing Fed officials as they balance inflation risks with employment concerns. The Fed just decided on its first rate cut of the year last week, but there are still huge disagreements on the path of future cuts. The dot plot released after the meeting showed that among 19 policymakers, 7 expect no further rate cuts this year and 10 expect at least a total of 50 basis points in further cuts.

Schmid Emphasizes the Necessity of Moderately Tight Policy

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

"Last week’s 25 basis point rate cut was, in my view, a reasonable risk management strategy. My view is that inflation remains too high, and while the labor market has cooled, supply and demand are still overall balanced."

Schmid explained that although he is concerned inflation is sticky and may rise to 3% instead of falling back to the Fed’s 2% target, recent weak labor market data have led him to believe the employment market may deteriorate more substantially or suddenly than expected.

Schmid stressed that inflation is still too high, while the labor market, though cooling, is generally balanced. He believes the current policy stance is "only slightly restrictive, which is exactly where it should be." Regarding future rate adjustments, Schmid said he will take a "data-dependent approach" and closely monitor inflation and labor market data.

Schmid also emphasized in his speech the importance of the Fed’s independence in bank regulation, saying that separating these functions from the Fed or placing them more directly under presidential control "is wrong and could lead to unintended consequences that are not fully considered."

Goolsbee Worries About Reemergence of Stagflation Risks

In his speech in Michigan on Thursday, Goolsbee expressed unease about aggressive rate cuts. He worries that cutting rates too quickly could hinder inflation from fully returning to its target. He specifically noted, "I feel uneasy about multiple front-loaded rate cuts just because of a slowdown in employment data." Goolsbee said:

"If we are in an environment where inflation has been above the 2% target for nearly five years and continues to worsen, then simply expecting inflation to be temporary (and cutting rates for that reason) makes me uneasy."

Goolsbee noted that the current environment shows signs of stagflationary shocks, calling it "the worst-case scenario" the Fed could face as it balances its dual mandate. He said that if data show the US economy is on track to maintain stable full employment and inflation is likely to return to 2%, then rates could be cut substantially from current levels.

Goolsbee said that US GDP data released this Thursday did not change his view of the growth trend. The Fed’s monetary policy is only mildly restrictive. The Fed is uncomfortable with inflation being in the middle of the 2%-3% range. While the Fed holds steady, rising inflation has similar effects as rate cuts.

However, Goolsbee also left room for further rate cuts, saying that more cuts are possible if economic data support them and stagflation risks subside. If data show the US is likely to maintain stable full employment and inflation could return to 2%, then he believes rates could be lowered significantly from current levels.

Goolsbee said he has not seen tariffs cause second-round price effects. Long-term inflation expectations are anchored, showing public confidence in the Fed. Many labor market indicators show the job market has cooled moderately.

Bowman and Miran Push for Continued Rate Cuts

In sharp contrast with the cautious voting members, Fed Vice Chair Bowman and Governor Miran continued to publicly push for more aggressive rate cuts on Thursday.

At an event at Georgetown University, Bowman reiterated concerns about the job market, noting that US inflation is close enough to the Fed’s target, but the labor market is more "fragile" than expected. She stressed that the inflation rate is now "within the Fed’s target range," and believes the impact of tariffs on prices may be one-off.

As a Trump appointee, Bowman warned on Tuesday that policymakers faced the serious risk of "falling behind the curve," noting that since April, employment growth has averaged only about 25,000 per month, far below early-year levels. She said "it’s time for the Committee to take decisive, proactive action."

Miran is even more aggressive, advocating for immediate, larger rate cuts. On Thursday he said the current 4% to 4.25% federal funds rate is significantly above neutral, and "when monetary policy is in such a restrictive stance, the economy becomes more vulnerable to downside shocks."

Miran clearly called for a round of "very short-lived 50 basis point rate cuts each time" to reach the neutral rate level, totaling a 150 to 200 basis point reduction. As the only official to cast a dissenting vote at last week’s FOMC meeting, he then advocated a 50 basis point cut instead of 25. This week, he admitted he was the only policymaker in the dot plot to project 150 basis points in cuts for this year.

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