At its July 29-30 meeting, the Federal Reserve kept interest rates steady-but the decision revealed a deeper problem: internal division over how to balance inflation risks, tariff impacts, and a cooling labor market.

In a historic moment, two Fed governors-Michelle Bowman and Christopher Waller-voted against holding the federal funds rate steady, preferring a cut instead. It marked the first multi-dissent vote in over three decades, a clear sign of growing disagreement inside the central bank.

Most officials warned that inflation remained the top concern, especially with new tariffs raising uncertainty. "Upside risk to inflation" was the most-cited issue in the official minutes. However, some participants argued that the labor market may be weakening faster than expected, representing a downside risk to employment.

Tariffs Fuel Inflation Concerns

The Fed minutes underscored how President Trump's 2025 tariff package-which affects imported steel, semiconductors, and farm inputs-has introduced "considerable uncertainty" about pricing and economic response.

Officials acknowledged that tariffs could become a loterm inflation driver, especially if businesses pass higher costs on to consumers. Some feared that inflation expectations could become unanchored, forcing the Fed to tighten policy even in a weakening economy.

Labor Market Signals Flashing Caution

Even before new employment data arrived, Fed officials saw signs of a slowing economy. Growth was described as "tepid," and consumer spending had cooled. Several members emphasized that incoming data suggested weakening labor conditions.

Indeed, just two days after the meeting, July's jobs report showed lackluster payroll growth-and May and June's figures were revised sharply downward. These updates seem to support the minority view at the Fed that rate cuts may soon be necessary.

Officials warned that the Fed may face difficult trade-offs if inflation remains high while the labor market deteriorates. The timing of rate changes could hinge on which variable-jobs or prices-drifts further from the Fed's dual mandate goals.

Political Pressure Mounts on Powell

The backdrop to the meeting was highly political. Donald Trump has launched fresh attacks on Chair Jerome Powell, urging immediate rate cuts and accusing the Fed of stalling economic growth. With Governor Adriana Kugler's resignation, Trump now has another opening to install a loyalist on the board.

Adding to the drama, Trump has demanded the resignation of Governor Lisa Cook, citing unverified claims related to mortgage fraud. Meanwhile, Powell's current term as chair ends in May 2026, but he can remain a Fed governor through 2028-unless political moves derail him.

All Eyes on Jackson Hole

This Friday, Chair Powell will deliver a highly anticipated speech at the Jackson Hole Economic Symposium. Analysts expect him to offer guidance on whether the Fed is preparing to shift policy-or if inflation hawks still dominate the conversation.

Markets are currently pricing in a strong chance of a rate cut in September, but that path is far from guaranteed. The Fed is walking a tightrope between high inflation, political influence, and a fragile labor market.

Key Points Recap

Fed remains split: Two governors wanted a rate cut, others pushed to hold steady.

Tariffs raise inflation fears, adding loterm uncertainty to pricing.

Labor market shows early signs of weakening, especially in job growth and consumer spending.

Trump escalates pressure on Powell, making monetary policy more politicized.

Powell's Jackson Hole speech could signal the direction for fall 2025 policy.