Federal Reserve likely to air divisions as it keeps rates unchanged

WASHINGTON (AP) — Two top Federal Reserve officials could dissent from the central bank’s likely decision Wednesday to hold its key interest rate steady, a sign of division at the Fed that reflects the economy’s muddy outlook and possibly the jockeying to replace Chair Jerome Powell when his term ends in May 2026.

Based on their public comments in the past two months, it’s possible that governors Christopher Waller and Michelle Bowman could vote against leaving the short-term rate at about 4.3%. If so, it would be the first time two governors have dissented in over three decades.

The division could be a preview of what might happen after Powell steps down, if President Donald Trump appoints a replacement who pushes for the much lower interest rates the White House desires. Other Fed officials could push back if a future chair sought to cut rates by more than economic conditions would otherwise support.

For now, any dissent also would likely reflect that there are at least two different ways to see the U.S. economy, which is clearly in flux. The first is the way that most Fed officials have described it: Unemployment is at a low 4.1%, while the economy is growing, albeit modestly, and inflation did tick up in June, largely because of tariffs.

So, the thinking goes, why not stand pat on rates and see what happens next? If inflation continues to worsen, a rate cut could make things worse — the Fed typically raises borrowing costs to combat inflation. And as long as the economy is doing well, there is no need to cut to support growth.

The other view is more worrisome: There are signs the economy is weakening, such as sluggish hiring, slower consumer spending, and pretty modest overall growth. The economy, in the first six months of the year, probably expanded at an annual rate of about 1.5%. At the same time, tariffs have lifted inflation by less than many economists expected, so far.

This is the view of the economy that Waller sketched out in a speech earlier this month.

“Private-sector payroll growth is near stall speed,” Waller said. “We should not wait until the labor market deteriorates before we cut the policy rate.”

When the Fed cuts its rate, it often — but not always — leads to lower borrowing costs for mortgages, auto loans and credit cards.

Some economists agree with Waller’s concerns about the job market. Excluding government hiring, the economy added just 74,000 jobs in June, with most of those gains occurring in health care.

“We are in a much slower job hiring backdrop than most people appreciate,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income.