Fed Chairman Jerome Powell’s semi-annual hearing before the US House offered few new insights. He reiterated the stance of waiting to see the effects of US trade policy before any adjustments in monetary policy, while noting the less severe impact of tariffs on inflation.

Discussions surrounding potential interest rate cuts have gained momentum. Michelle Bowman of the Board of Governors suggested cuts in July if inflation remains low, contributing to the depreciation of the US dollar. Governor Christopher Waller indicated the federal funds rate might be 1.25–1.5 percentage points above neutral.

The Federal Reserve’s Rate Strategy

Some officials prefer a cautious approach regarding interest rate changes. The president of the Kansas City Fed and Federal Reserve Governor Michael Barr echo Powell’s preference to observe tariff impacts first, with Barr noting the economy’s solid position. Heated discussions and potential rate cut expectations could rise in July if inflation remains unaffected by tariffs. Additional cuts of around 12 basis points are anticipated by year’s end, which may increase if FOMC consensus shifts. This evolving situation presents challenges for the US dollar.

This article outlines how key members of the Federal Reserve are currently assessing the timing and scale of potential interest rate reductions, with the Chairman giving little away beyond reinforcing a data-dependent, wait-and-see approach. Under scrutiny are the effects of trade policies—particularly tariffs—on inflation and broader economic conditions. While initial concerns were that these tariffs could sharply drive up prices, Powell downplayed that outcome, suggesting they’re producing a more muted response than feared. That alone was enough to keep the door open for staying on hold.

More immediate movement within the Fed, however, came from others. Bowman directly indicated that rate reductions could begin as early as July, provided inflation doesn’t rebound. Such a stance places her closer to markets, which are now leaning toward loosening assumptions more quickly. As a result, we’ve already seen currency pressure mounting—especially with the dollar pulling back, hinting at market participants recalibrating expectations.

Waller added some technical marker to the conversation. From his estimates, policy rates remain well above the neutral level, perhaps by more than a percentage point. For us, that reinforces the idea that there’s room—possibly quite a bit—to reduce borrowing costs without crossing into outright stimulus territory. The question then becomes less about where rates go, and more about how urgently they’re taken there.

Market Reactions and Projections

Others within the committee, like Barr and George, appear unconvinced that pre-emptive moves are necessary. They continue to favour watching how the economy digests the tariff policy over time. It’s a stance we’ve seen before—those who’d rather be late than wrong. That being said, Barr’s comment on overall economic strength does show the Fed is not feeling pressured from growth risk.

As we head toward the July meetings, what unfolds between now and then matters. Inflation data is linchpin. If consumer prices remain stable, the doves within the Fed are likely to gain traction. The baseline in current pricing implies around 12 basis points of further easing before year-end, though that number will not stay fixed if broader sentiment turns.

For our part, the next few sessions should focus closely on the front-end of the curve. Any repricing there can offer early signs of consensus change. Real yields—and their movement relative to inflation breakevens—will carry signals about how deeper rate cuts are becoming priced in.

If volatility rises within short-maturity instruments, particularly swaps or fed funds futures, we should treat that as a lead rather than a lagging response. This kind of divergence between committee members often finds resolution in markets first, and in official statements later. The extent to which that friction continues, or softens, could be the directional cue we need.

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