Disagreements at the Federal Reserve reemerge: Some say the impact of tariffs on inflation will not be lasting, while others expect the effects to last until next year

In addition to the timing of interest rate cuts, Federal Reserve officials have also revealed their differences regarding the impact of tariffs on inflation.

On Thursday, July 10, Eastern Time, Mary Daly, President of the San Francisco Federal Reserve and a voting member of the Federal Open Market Committee (FOMC) in 2027, stated that she expects tariffs will not have a very lasting impact on inflation. Daly mentioned that it is time to consider adjusting interest rates, and the Federal Reserve should always be open to rate adjustments, implying that she acknowledges that waiting too long could lead to a lag in rate cuts.

Daly believes that the impact of tariffs on prices may be smaller than expected. She noted that some businesses are negotiating to share the cost of tariffs, so they do not have to pass most of the costs onto the end customers.

"By the time it reaches the final consumers, they find that the costs they have to pass on are lower, and some costs can be deducted from profits. Because businesses have found ways to adjust, this may not lead to a significant increase in consumer prices."

Daly stated that the U.S. economy is in good shape, with economic growth and consumer spending slowing but not weakening. Inflation is moving towards the Federal Reserve's 2% target. She still expects the Federal Reserve may cut rates twice this year, but also pointed out that there is significant uncertainty in the policy outlook, and rate cuts require the Federal Reserve to continue the current data trend. She said:

"I think two rate cuts are a possible outcome, but there is uncertainty in everyone's predictions."

Earlier on Thursday, Jim Bullard, President of the St. Louis Federal Reserve and a voting member of the FOMC this year, did not directly mention expectations for the timing of rate cuts but emphasized that the impact of tariffs on inflation will take time to manifest, reflecting a cautious attitude towards rate cuts.

Bullard stated that there are upside risks to inflation, and it is still too early to determine whether tariffs will have a lasting impact on prices. So far, the impact of tariffs on inflation has not been significant, but he expects their effects to become more apparent in the data starting from June, July, August, or September. He said:

"The tariff issue takes time to resolve." "There is a scenario where, in the fourth quarter of this year, or in the first or second quarter of next year, tariffs may still be impacting the economy."

"I think as the year progresses, I will have a clearer understanding of the overall impact of tariffs. I am not seeking a completely certain outcome, but I am seeking enough confidence in a certain direction."

Bullard stated that long-term inflation expectations have been anchored and reiterated the importance of maintaining stable inflation expectations, as consumers remain sensitive after experiencing soaring prices during the pandemic. Regarding how U.S. government debt will affect interest rates and the economy, he mentioned that the U.S. fiscal deficit is on an unsustainable path. The government's deficit may pose issues for financial stability in the future.

After Bullard's speech and before Daly's remarks, Federal Reserve Governor Christopher Waller again suggested considering a rate cut in July, highlighting the internal divisions within the Federal Reserve regarding the timing of rate cuts.

Three weeks ago, the FOMC meeting decided to remain on hold, and the dot plot released after the meeting showed that most Fed policymakers still expect two rate cuts this year, but the number of those expecting no rate cuts increased by three to seven, while those expecting two rate cuts decreased by one to eight Reflecting the intensification of internal divisions. Wall Street Insight later mentioned that Citigroup's research report believes there is a "historical-level split" within the Federal Reserve regarding the monetary policy path.

The chart in the aforementioned Citigroup report shows that in the recent dot plot, Governors Waller and Bowman conditionally support a rate cut in July, which from this perspective is considered dovish. Federal Reserve Chairman Powell and Daly both expect two rate cuts this year, with Powell representing the centrist view, stating that he will observe the data throughout the summer to determine the timing of rate cuts. Officials like Musalem are cautious about rate cuts this year, expecting that there will be no cuts.