Public comments by several Federal Reserve officials in recent days have brought some clarity to the outlook for Fed interest rate cuts in 2025. While Fed officials agree there is a path to rate cuts this year, there are key differences in inflation projections among central bank members.
The Fed’s primary tool to manage U.S. monetary policy is the federal funds rate, which is the overnight bank lending rate that serves as a benchmark for other interest rates. While lower rates help stimulate the economy by decreasing borrowing costs, the Fed is less likely to cut rates during periods of heightened inflation, as this has the tendency to push consumer prices higher.
Fed Governor Christopher Waller, a current member of the Federal Open Market Committee (FOMC) that votes on interest rate policy, said during a Monday morning speech in South Korea that he expects the Trump administration’s tariff policies will be the “largest factor driving inflation” in 2025 and 2026.
Waller said the wild vacillations in President Donald Trump’s mercurial tariff policies and the uncertainty surrounding tariff-related litigation means the effective tariff rate could land anywhere from 10% to 25% by year-end. He said he expects the effective tariff rate to end up around 15%, which would likely result in an inflation rate closer to 3% than 4% on an annualized basis by the end of 2025 if businesses absorb some of the impacts of tariff increases.
Waller acknowledged that “there is very little evidence” of the impacts of tariffs in the April economic data, though “that may change in the coming weeks.” Last Friday, the Bureau of Economic Analysis reported that the personal consumption expenditures price index, a widely tracked measure of inflation, rose 2.1% in April compared to a year ago. The Fed’s target inflation rate is 2%.
In comparison, Waller noted, “there is evidence of tariff effects in the ‘soft data’ based on surveys of consumers, businesses and investors — indications of an expected slowdown in economic activity and an increase in prices.”
Still, Waller thinks that “any tariff-induced inflation will not be persistent” over the long run, and if “underlying inflation continues to make progress to our 2% goal, and [if] the labor market remains solid, I would be supporting ‘good news’ rate cuts later this year.”
Fed voting member Austan Goolsbee, who serves as president and CEO of the Federal Reserve Bank of Chicago, said Monday that he is “a little gun-shy” about assuming that the inflationary impact of tariffs will be temporary, according to Reuters. He noted that the Fed’s prediction of transitory inflation during the COVID-19 pandemic turned out to be a miscalculation.
But Goolsbee also didn’t rule out rate cuts this year, per the Reuters report, saying that “if we can get past this bumpy period,” the Fed’s dual mandate of maintaining stable prices and maximum employment “looks pretty good.”
Finally, Mary Daly, president and CEO of the Federal Reserve Bank of San Francisco — who is not a current FOMC voting member but is scheduled to be one in 2027 — said during a May 30 interview with Fox Business that the Fed wants to ensure that inflation stays sustainably at 2% before committing to a rate-cut plan.
“We’re standing center court,” Daly said, using a tennis analogy. “We can agilely move one way or another as the data unfolds, but we want to keep the policy rate modestly restrictive for now until we are sure that inflation is going to hit that 2% target.”
Daly struck a cautiously optimistic tone when asked if she expects to see interest rate cuts this year.
“I’m still comfortable with the Summary of Economic Projections, which we put out in December and in March, that said two rate cuts seemed like a good forecast,” Daly said. “Of course, with all the uncertainty, forecasts are subject to change.”
The FOMC’s next monetary meeting is scheduled for June 17-18. It has four additional meetings scheduled in 2025 in July, September, October and December.
