It’s a widely held belief among economists that President Donald Trump’s tariffs will boost inflation notably over the next few months. But muted price increases so far have called that assumption into question, emboldening the White House and opening up divisions at the Federal Reserve.

Anticipation of firmer inflation has kept the U.S. central bank from delivering interest-rate cuts this year as it waits to see what happens. The Trump administration is applying intense pressure on Fed Chair Jerome Powell to bring down borrowing costs, and two Fed governors in recent days have publicly diverged from Powell by asserting a cut could be appropriate as soon as July.

A pair of key reports in the coming weeks — the monthly jobs report due Thursday and another on consumer prices due July 15 — will be critical in determining the central bank’s next steps. Both are expected to finally begin reflecting the impact of tariffs, but any surprises could change the schedule for rate cuts.

“One of the things that makes it such a difficult situation is that we simply haven’t done this sort of experiment in the past,” William English, a professor at the Yale School of Management and former high-ranking Fed economist, said of the tariffs. “We’re outside the range of experience for a modern U.S. economy, and so it’s very difficult to be confident about any forecast.”

Trump and his allies have escalated attacks on the Fed and Powell in recent weeks, motivated by data showing inflation remained tame through May despite the tariffs put in place. The president has lobbed several insults at Powell, calling him a “numbskull” and “truly one of the dumbest, and most destructive, people in Government.”

Other Trump administration officials and some congressional Republicans — oftentimes more reticent to weigh in on monetary policy — have joined in as well. Kevin Hassett, director of the White House National Economic Council, said on June 23 that there is “no reason at all for the Fed not to cut rates right now.”

Hassett, who is seen as a possible replacement for Powell when the Fed chair’s term expires next year, emphasized data due in the coming weeks: “I would guess that if they see one more month of data, they’re going to really have to concede that they’ve got the rate way too high,” he said.

And Treasury Secretary Scott Bessent said Monday on Bloomberg TV that Fed officials “seem a little frozen at the wheel here” after having made “a gigantic mistake” letting inflation run too far in 2022.

The debate reflects the delicate situation the Fed is in as it aims to avoid a policy mistake. Should officials cut rates just as tariff-induced price pressures kick in, they may have to resort to more aggressive measures later on. But holding rates at an elevated level to combat inflation that never materializes risks restraining the economy unnecessarily, potentially damaging the labor market in the process.

Forecasters expect inflation to accelerate in the coming months. Powell told Congress in testimony last week he expects “meaningful” price increases to materialize in June, July and August data as the levies work their way through the economy. But he added Fed officials are “perfectly open to the idea” the impact could be smaller than feared, “and if so, that’ll matter for our policy.”

The Bureau of Labor Statistics will publish its report on consumer prices for June on July 15, two weeks before the central bank’s next policy meeting. Fed Governors Christopher Waller and Michelle Bowman — both Trump appointees — have broken step with Powell and their other colleagues to raise the possibility of a rate cut next month if the data cooperate.

“I think we’ve got room to bring it down, and then we can kind of see what happens with inflation,” Waller said in a June 20 CNBC interview, adding the central bank could always bring a halt to rate cuts again if necessary. “We’ve been on pause for six months to wait and see, and so far the data has been fine.”

Still, investors currently see only about a 20% chance of a July move and are instead betting the next cut will come in September, according to federal funds futures.

Tariff math

Benign inflation readings through May suggest companies are finding ways, at least for now, to avoid price hikes despite Trump’s tariffs on dozens of U.S. trading partners — and widespread uncertainty over how long the duties will last and the level where they’ll ultimately settle.

One potential explanation is companies are working through inventories of imports they frontloaded in the first quarter to get ahead of the levies, said Josh Hirt, a senior U.S. economist at Vanguard Group.

Hirt’s calculations suggest that, on average, importers this year have paid an effective tariff rate lower than what Trump has put in place, largely because so much was brought in before they took effect.

Another source of uncertainty Powell discussed in his testimony is just how the costs of the tariffs will be split between exporters, importers, retailers, manufacturers and consumers.

“In the beginning, it will be the importer that pays the tariff, but ultimately it will be spread out among those five,” Powell said, adding that data suggests at least some of the impact will fall on consumers.

Before the July 15 inflation report comes equally consequential monthly data on employment, due from the BLS on July 3. So far this year, there’s been little indication that tariffs have put a dent in hiring, which has allowed the Fed chair and many of his colleagues to maintain that a solid labor market means there’s no rush to cut rates.

But as with the inflation data, forecasters have largely maintained that any potential labor-market impact of the trade policy upheaval wouldn’t be visible before the release of the June figures. In a Bloomberg survey, economists said they expect the this week’s report will show the unemployment rate in June crept up to 4.3%, which would mark the highest level since 2021.

Bowman, in a June 23 speech, said Fed officials should “recognize that downside risks to our employment mandate could soon become more salient, given recent softness in spending and signs of fragility in the labor market.”

Monthly consumer spending figures published Friday by the Bureau of Economic Analysis showed a drop in outlays in May as households pulled back on discretionary services like travel and dining, and forecasters warned higher prices in the months ahead would put more pressure on consumption.

English, at Yale, said the impact of tariffs will depend on factors which are difficult to measure. But “the kind of intuition that there’s going to be some pass-through of the tariffs to prices just feels right,” he said. “I am not yet thinking that the basic story is wrong.”

(With assistance from Sonali Basak.)

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