When the Federal Reserve meets to vote on interest rates in September, Treasury Secretary Scott Bessent believes the central bank should make a major move.
He called on Fed leaders Wednesday to steer clear of gradualism and reduce interest rates by half a percentage point next month, with a series of cuts that would lower borrowing costs from the current 4.25 percent to 4.5 percent barrier.
Without a significant decline in the labor market, that is unlikely to occur, which keeps Fed Chair Jerome H. Powell at odds with the administration's demands. Interest rates ought to be at least 1.5 percentage points lower than they are presently, Mr. Bessent stated on Wednesday. President Trump has called for an even more drastic cut, stating that rates ought to be slashed to about 1 percent, which is often only done during times of economic hardship.
Following a rather ambivalent inflation data, Mr. Bessent called for sharply lower interest rates.
The Consumer Price Index's overall price increases in July were sufficiently muted to support the Fed's proposal to cut interest rates in the middle of September. However, last month saw a sharp increase in prices in the services sector, which left economists and policymakers wondering if this was a passing trend or the beginning of a more concerning one that may make it difficult for the Fed to make substantial moves.
Although it has recently started to move in bigger increments, the Fed normally modifies interest rates by a quarter-point. The central bank began a series of interest rate cuts last September with a half-point cut, which Mr. Powell said at the time was appropriate because the labor market needed to be strengthened and inflation had subsided from its previous peak. He acknowledged in May that the Fed had been "a little late," implying that the September action was merely a catch-up measure following the previous meeting's holding of interest rates constant.
Today, however, the background is extremely different. First, interest rates are significantly closer to what policymakers define as a "neutral" level—one that neither accelerates nor decelerates the economy. Although the precise definition of neutrality is quite ambiguous, Mr. Powell and other officials have repeatedly stated that their policy settings are only "modestly restrictive." That implies that interest rate reductions are not too far off from reaching the Fed's target level.
The economy was under far more downward pressure a year ago when interest rates were a full percentage point higher. Cutting significantly now carries the danger that the Fed will end up stimulating the economy more than officials would want, but going big back then had little downsides.
Official disagreements over interest rate policy are also much more pronounced now than they were in the past, indicating that it may be difficult to come to any sort of agreement in the absence of concrete proof that the economy is rapidly approaching a catastrophic downturn.
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Two Trump-appointed members of the Board of Governors opposed the Fed's July decision to maintain interest rates unchanged, calling for a quarter-point decrease instead. This was one of the most controversial Fed decisions in decades. The main points of contention were the status of the labor market, Mr. Trump's tariffs, and their effect on inflation.
Mr. Powell admitted throughout the summer that the Fed probably could have lowered interest rates by now if Mr. Trump's tariffs hadn't been in place.
Instead, Michelle W. Bowman and Christopher J. Waller, the two officials who dissented, contended that the tariffs would only result in a short-term increase in consumer prices. They claimed that this allowed the Fed to continue cutting borrowing prices even as inflation picked up speed. Additionally, they cautioned their peers against being overly optimistic about the job situation.
Since then, more officials have begun to publicly support the idea of resuming rate cuts following a dismal employment report that revealed warning flags in the labor market. Mary Daly, head of the Federal Reserve Bank of San Francisco, recently stated that the Fed should act since labor market concerns were increasing and inflation was lower than anticipated.
The president of the Federal Reserve Bank of Richmond, Thomas Barkin, likewise loosened his position this week, admitting that the inflationary pressures brought on by Mr. Trump's tariffs might not be as severe as initially anticipated.
"We may see pressure on unemployment and inflation, but it's still unclear how the two will balance out," he stated on Wednesday.
However, there are other holdouts who seem to be more hesitant about reduction because they are more worried about the inflation prospects. The Kansas City Fed's Jeffrey Schmid made the case this week that the tariffs' little impact on inflation was evidence that monetary policy was "appropriately calibrated."
Raphael Bostic of the Atlanta Fed claimed Wednesday that the Fed still had the "luxury" of making policy choices slowly. Later in the day, Austan Goolsbee of the Chicago Fed bemoaned the increase in services inflation in the consumer price report for July and advised against extrapolating too much from the steep decline in monthly employment growth.
Picture
A dental X-ray is displayed on a screen within a dentist's office.
July saw the largest monthly price increase for dental treatments since the government began tracking the data in 1995. Give credit... Drehsler, Ariana, for The New York Times
The Fed has long anticipated that Mr. Trump's tariffs will raise the price of commonplace goods that Americans purchase. The group of people who believe that the ensuing price pressures would only last a short time have insisted that the tariff's effects will only affect the goods that are most vulnerable to the levies and not spread throughout the entire economy. In light of this, the Fed might lower interest rates even if inflation picked up speed.
However, the Consumer Price Index for July acted as a caution. A key indicator of underlying inflation took a concerning shift, even though overall inflation came in largely as anticipated, with the annual pace remaining stable at 2.7 percent. As inflation in the services sector grew, "core" prices—which exclude volatile food and energy items—saw their largest monthly increase since the year began. Compared to the previous year, such prices increased by 3.1%.
In July, after months of sharp drops, airfares increased by 0.4 percent. Automobile maintenance and repair expenses increased by 1%. Services for medical treatment increased by 0.8 percent. Possibly the most peculiar of this month's data was that dental services saw the largest monthly increase since the government began disclosing such information in 1995.
There are grounds to believe that the price increases in July won't last. According to economist Joseph Lavorgna, who is now Mr. Bessent's counselor, price increases related to housing are still well contained, and the categories that saw a significant increase last month might just be an anomaly. However, the data was significant enough to make analysts question whether the spike in services was the beginning of a more troubling pattern that would limit the amount of relief the Fed can offer borrowers in the months ahead.
According to Blerina Uruci, chief U.S. economist at T. Rowe Price, "stickiness in services inflation at a time when goods inflation is accelerating is the worrying sign for me." "When the Fed is lowering interest rates, I don't see what will bring inflation down to 2 percent."
The bar to support further interest rate cuts is probably going to rise if services inflation remains high. It might also restrict the total amount of borrowing cost reductions the Fed makes.
According to Joseph Brusuelas, chief economist at the accounting company RSM, "they're going to need to see a much weaker jobs report than what we observed in July and a more friendly inflation outlook than what the last few months have implied."
However, Mr. Goolsbee brought up the point on Wednesday that the definition of a poor labor market has evolved in response to Mr. Trump's immigration crackdown. Rather than a decline in demand, much slower monthly employment growth might just be the result of a shortage of personnel. This makes the unemployment rate—which increased little to 4.2 percent last month—and other labor market indicators more important.
James Egelhof, chief U.S. economist at BNP Paribas, stated, "We are not receiving recessionary signals from the economy." He pointed to the fact that, despite a dramatic decline in the pace of monthly job growth, job opportunities have remained reasonably consistent, unemployment claims have remained low, and financial markets have risen to all-time highs.
Rather, he observes a structural change occurring in the labor market as a result of Mr. Trump's policies, which are reducing the economy's total potential. Interest rate reductions could be "harmful" in that setting, he said.
"You push the economy faster when it doesn't have the capacity because there are no more people in the labor force if you cut rates into a structural environment," Mr. Egelhof stated. "In fact, you increase inflation."
