Waller and Bowman urge for a "palace coup" style interest rate cut.

Bowman:

At the recent Federal Open Market Committee (FOMC) meeting, I voted against the decision because I concluded that a 25 basis point reduction in the policy rate is the appropriate stance. In my speech on July 17, I elaborated on the reasons for a rate cut at the July FOMC meeting, and my views have not changed since then. I will reiterate the reasons for doing so.

First, tariffs are a one-time increase in price levels, and apart from a temporary rise, they do not trigger sustained inflation. As long as inflation expectations are firmly anchored (and they indeed are), the standard central bank approach is to 'look through' such price level effects.

Secondly, a large amount of data indicates that monetary policy should currently be close to a neutral level rather than a tightening state. In the first half of this year, the actual GDP growth rate was 1.2%, and it is expected to remain weak for the remainder of 2025, which is far below the median estimate of long-term GDP growth rate by FOMC participants. Meanwhile, the unemployment rate is at 4.1%, close to the committee's long-term estimate; if we disregard what I believe will be temporary tariff effects, the overall inflation rate is also just slightly above 2%, close to our target. Overall, this data suggests that the policy rate should be around a neutral level, while the median estimate by FOMC participants is 3%, rather than the level we are currently at, which is 1.25 to 1.50 percentage points higher than 3%.

The final reason I support an immediate interest rate cut is that, although the labor market appears to be doing well on the surface, once we take into account the expected future data revisions, wage growth in the private sector has nearly stagnated, and other data also indicate that the downside risks to the labor market have increased. Given that core inflation is close to the target and that the upside risks to inflation are limited, we should not wait until the labor market deteriorates to lower the policy rate.

I fully respect the views of my colleagues at the FOMC who suggest that we need to take a "wait-and-see" attitude toward the inflation effects of tariffs. It is perfectly fine to have different opinions on how to interpret the newly released data and to use different economic arguments to predict how tariffs will impact the economy. These differences are a sign of a healthy and vibrant policy discussion.

However, I believe that the "wait-and-see" strategy is overly cautious, and in my view, it fails to appropriately balance the various risks in the outlook, which may lead to policies "falling behind the curve." So far, the price effects of tariffs have been minimal, and because we may not be able to clarify tariff levels or their ultimate impact on the economy in the coming months, the labor market is likely to struggle before this clarity is obtained—if such clarity can be obtained at all. When the labor market shifts, it often happens very quickly. If we find that the economy needs support, waiting may unduly delay our adjustment to appropriate policies.

My position does not imply that I believe the FOMC should lower the policy interest rate along a preset path. We can lower interest rates now and then observe the evolution of the data. If the tariff effects do not cause a significant shock to inflation, the committee can continue to lower rates at a moderate pace. If we indeed encounter significant unexpected upward movements in inflation and employment, we can pause. But I see no reason why we should keep the policy interest rate at the current level and risk a sudden downturn in the labor market.

Waller:

On July 30, 2025, Wednesday, I voted against the Federal Open Market Committee (FOMC) decision to maintain the federal funds rate target range at its current level. As noted in the committee's post-meeting statement, I leaned towards lowering the federal funds rate target range by 25 basis points.

After excluding the temporary effects of tariffs, inflation has significantly approached our target, and the labor market remains close to full employment levels. Given the slowdown in economic growth this year and signs of weakening labor market vitality, I believe it is appropriate to start gradually adjusting our moderately tightening policy stance to a neutral level. In my view, this action could proactively hedge against the risks of further economic weakness and the risks of labor market deterioration.

The U.S. economy remains resilient

In the first half of this year, the U.S. economy has remained resilient. Although fundamental economic growth has significantly slowed, the labor market has remained stable at levels close to full employment estimates. After excluding tariff-related price increases for goods, we have also made meaningful progress in bringing inflation down to the 2% target.

In comparison to the strong growth in 2024, the growth rate of domestic final purchases in the private sector has significantly slowed this year, reflecting weak consumer spending and a decline in residential investment. This soft demand may reflect factors such as high interest rates, a slowdown in personal income growth, and a reduction in liquid asset buffers for low-income households alongside an increase in credit card usage.

Total wage employment continues to grow modestly, and the unemployment rate remained at a historical low in June. However, the labor market has become less dynamic and is increasingly showing signs of weakness. The employed population this year has significantly declined, companies are reducing hiring but are retaining existing employees, and new job openings are unusually concentrated in a few industries that are less affected by the business cycle, including healthcare and social services.

In the absence of tariff impacts on product prices, the year-over-year change in core Personal Consumption Expenditures (PCE) prices for June will be below 2.5%, lower than the high reading of 2.9% in December last year, and significantly close to our 2% target. This progress reflects a notable slowdown in recent core PCE services inflation, which is consistent with the recent weakness in consumer spending and the fact that the labor market is no longer a source of inflationary pressure.

Concerns About Our Employment Mission Increasing

In terms of the risks associated with achieving our dual mandate, I see that the upside risk to price stability has diminished, as I am increasingly confident that tariffs will not pose a persistent shock to inflation. With inflation on a sustained trajectory toward 2%, weak total demand, and signs of weakness in the labor market, I believe we should begin to place greater emphasis on the risks to our employment mandate.

So far, due to the fresh memory of labor shortages during the pandemic, companies have been reluctant to cut their workforce when facing a slowdown in economic conditions. Moreover, given the weak demand, they seem more willing to cope by lowering profit margins, as they are less able to fully pass on higher costs and raise prices. If the demand situation does not improve, companies may have no choice but to start layoffs, recognizing that, given the changes in the labor market, rehiring may not be as difficult.

The Policy Pathways in My Eyes

As the price increases related to tariffs may only be a one-time effect, it is appropriate to "look through" the temporarily high inflation readings. When I recognize that the economic conditions are changing, I believe that beginning to gradually move our policy interest rates toward neutral levels will help maintain the labor market close to full employment and ensure steady progress in achieving our dual mandate's two objectives. I see that the risk of delaying action could lead to a deterioration in the labor market and further slowdown in economic growth. Taking a proactive approach to move toward neutral levels will avoid unnecessary erosion of labor market conditions and reduce the likelihood that the committee will have to implement much larger policy adjustments in the future.

In my view, it is equally important for the committee's monetary policy decision-making approach to maintain consistency over time—especially as we face changing economic conditions.

I recognize and understand that other FOMC members may have different views, and they feel more comfortable maintaining the target range for the policy interest rate unchanged. I remain committed to working with my colleagues to ensure that monetary policy is appropriately positioned to achieve our dual mandate of maximizing employment and price stability.