Fed minutes show split as officials grapple with tariffs, inflation risks, and labor market weakness

US Fed Minutes: US Federal Reserve officials expressed rising concern over both persistent inflation and a softening labor market at their July policy meeting, but most agreed it was still too soon to begin cutting interest rates, according to minutes released Wednesday.

The Federal Open Market Committee (FOMC) voted to hold the federal funds rate steady at 4.25–4.5 per cent, but for the first time in over three decades, multiple Fed governors—Christopher Waller and Michelle Bowman—formally dissented, advocating for a rate cut.

The minutes revealed a policy divide at the heart of the central bank. While a majority of officials prioritized inflation risks, a smaller group pointed to emerging employment vulnerabilities and slowing consumer demand as reasons for preemptive action.

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“Participants generally pointed to risks to both sides of the Committee’s dual mandate, emphasizing upside risk to inflation and downside risk to employment,” the minutes said. While most saw inflation as the greater concern, “a couple of participants” judged labor market risks to be more pressing.

Tariffs, Jobs, and Tepid Growth

The meeting also highlighted uncertainty surrounding the impact of tariffs, particularly those imposed during Donald Trump’s presidency. Fed officials warned that trade restrictions could contribute to further price volatility and unanchor inflation expectations.

At the time of the meeting, officials did not yet have access to the latest nonfarm payrolls report, which later showed weaker-than-expected job growth in July, along with downward revisions for May and June.

Even so, policymakers were already flagging a noticeable cooling in economic momentum, noting that “downside risk to employment had meaningfully increased” due to slowing activity and weaker consumer spending.

A Fed staff assessment described the economy as “tepid” in the first half of 2025, despite unemployment remaining low.

“Participants noted that the Committee might face difficult trade-offs if elevated inflation proved more persistent while the labor market weakened,” the minutes added.

Powell Set to Speak as Political Tensions Mount

The minutes come just ahead of Fed chair Jerome Powell's keynote address at the central bank’s annual Jackson Hole symposium on Friday. Markets will be watching closely for signals on whether the Fed is preparing to pivot toward rate cuts or remain cautious into 2026.

The Fed’s internal debate is unfolding amid increasing political scrutiny. President Donald Trump, who has repeatedly criticised Powell, is now pressuring the Fed Board more directly. Trump recently called for the resignation of Governor Lisa Cook, alleging mortgage fraud—accusations that remain unverified.

Following the recent resignation of Governor Adriana Kugler, Trump is also expected to nominate a new candidate to the board. According to reports, the White House has identified 11 potential successors to Powell, whose term as chair ends in May 2026. Powell, however, may continue as a Fed governor until 2028.