Fed Faces Risks of "Delayed Inflation" Transmission, but Policy Divisions and Political Intervention Intensify

Significant divisions are emerging within the Federal Reserve regarding the path of monetary policy. Coupled with continued pressure from President Trump and uncertainties surrounding trade and immigration policies, global financial markets are facing a complex test woven from policy expectations and political intervention.

Last week, the Fed initiated its first interest rate cut of the year, lowering the target range for the federal funds rate by 25 basis points to 4.0%–4.25%. This decision gained support from most policymakers, including San Francisco Fed President Mary Daly, who expressed full support for the cut and pointed to signs of slowing economic growth, consumer spending, and the labor market.

"Further policy adjustments may be needed to restore price stability while providing necessary support to the labor market," Daly stated on Wednesday. "But this is a forecast, not a promise. We must weigh the pros and cons and make choices repeatedly." She emphasized that the rate cut aims to provide a buffer for the job market, prevent further deterioration, and continue guiding inflation back toward the 2% target.

However, Chicago Fed President Austan Goolsbee expressed a more cautious stance. While supporting last week's rate cut decision, he warned against "rushing to initiate a series of rate cuts." He noted that although inflationary pressures have eased, the inflation rate has remained above the 2% target for four and a half consecutive years and is "moving in the wrong direction."

Citing real-time labor data compiled by the Chicago Fed, Goolsbee stated that the current job market shows only "moderate" cooling, with a 4.3% unemployment rate still at historically low levels and overall stability maintained. He particularly emphasized that while the Trump administration's tariff policies might cause one-time price increases, they have not triggered persistent inflation, and therefore, an overreaction should be avoided.

The White House continues to pressure the Fed regarding the pace of rate cuts. Treasury Secretary Scott Bessent publicly criticized Fed Chair Jerome Powell on Wednesday for not clearly signaling further rate cuts. "Current interest rates are too restrictive and need to be lowered," he said in an interview with Fox Business. "I am somewhat surprised that Chair Powell did not signal a target of at least 100 to 150 basis points in rate cuts by the end of the year."