What can two votes against do? The Fed still does not lower interest rates.

At 02:00 Beijing time on Thursday, the Fed maintained the interest rate unchanged for the fifth time, keeping the benchmark interest rate target range at 4.25%-4.50%, in line with market expectations. This decision by the Fed was made against the backdrop of strong political pressure from the White House on Chairman Powell, demanding a rate cut.

The Fed has kept its benchmark policy interest rate in the range of 4.25% to 4.5%, while weighing how importers, retailers, and consumers will share the costs of higher tariffs. The outcome of the intense debate over who will bear the burden of the tariffs may determine the direction of inflation and employment later this year, and could influence whether and when the central bank resumes rate cuts in the coming months.

The Fed made almost no changes in its policy statement, indicating that it currently has no intention of signaling any imminent interest rate cuts.

The decision to keep the interest rate unchanged faced rare opposition from two officials, with Fed Governor Waller and Bowman calling for an immediate 25 basis point cut. This marks the first time since 2020 that more than one Fed official has voted against Powell's decision in a meeting, and it is also the first time since 1993 that two board members have held differing opinions.

Fed Governor Waller stated two weeks ago that he supports a rate cut, which aligns with his potential nomination to succeed Powell as Fed Chair next spring. Earlier this month, he expressed concern that maintaining excessively high interest rates is too high for an economy that lacks the impetus to push inflation up—a view that has also been supported by some economists and former Fed officials.

Fed Governor Bowman has previously been a staunch representative of the hawkish stance and opposed the first interest rate cut that began in September last year; her shift this time is quite remarkable.

Powell and his colleagues are studying how tariffs are reflected in inflation data, with the market generally concerned that rising commodity prices could result in inflation exceeding the Fed's 2% target for the fifth consecutive year. Although inflation has clearly retreated from its peak between 2021 and 2023, and there has been no recession as predicted by many economists, Fed officials remain highly vigilant against premature rate cuts that could reignite price pressures.

Many businesses have been stockpiling inventory before the tariffs take effect, reluctant to raise prices due to concerns about losing consumers crushed by inflation. However, some economists warn that as low-margin businesses deplete their pre-tariff inventories and face higher costs, they may become increasingly inclined to pass these costs onto consumers.

Former Powell's deputy, Richard Clarida, appointed by Trump, stated:

Powell currently has too many things to balance, but there is one thing he has indeed mentioned, and that his critics have not fully recognized, which is that tariffs have indeed been reflected in some price indices. The reason inflationary pressures have not spiraled out of control is that service prices have remained stable.

The economic data released earlier on Wednesday sent mixed signals, explaining the Fed's cautious stance. Although second quarter GDP growth reached 3.0%, exceeding expectations, the measure of demand from private enterprises and consumers slowed from 1.9% in the previous quarter to 1.2%, far below the 2.9% at the end of last year.

Economists attribute this decline to a slowdown in labor force growth and the impact of tariffs. Other recent data indicate that consumer spending may have stabilized before the rise in import costs was reflected in retail prices.

However, the Trump administration believes that in the long run, tariffs will make the United States wealthier by promoting high-wage manufacturing jobs.

In understanding the economic policies of the Trump administration, the Fed has fallen into a "two steps forward, one step back" cycle. The tariff levels set by the recent trade agreements between the U.S., Japan, and the European Union are 15%, which is lower than Trump's threatening remarks in April of this year, but still higher than market expectations at the beginning of the year. Trump's unpredictability also leaves the possibility of future tariff increases, along with the risk of judicial challenges that could overturn these tariffs.

On the fiscal front, Trump signed a major tax cut bill this month. Some Republican lawmakers are discussing rebates to consumers, which could provide new stimulus to an economy that the Fed believes is close to full employment. If the labor market remains stable as a result, Fed officials may regret having cut interest rates too early.

Investors currently expect that the probability of the Fed cutting interest rates at the September meeting is about two-thirds, but this depends on whether the impact of tariffs on inflation remains controlled and whether there are more signs of weakness in the labor market.

In the coming months, the internal divisions within the Fed may focus on the following issues: whether the speed at which tariffs damage the economy will exceed the speed at which they push up inflation, and whether hasty actions taken before clarity emerges may lead to policy misjudgments.

One viewpoint holds that the current interest rate level is higher than the range suitable for the actual economic conditions, and the fundamental pressure from inflation is insufficient. If employment growth stalls, the Fed will confirm criticisms from the White House and others that they are "behind the curve."

But another faction is concerned that cutting interest rates amidst the rising pressure on prices due to summer tariffs, or under the dual impetus of fiscal stimulus and active financial markets, could bring about an unexpected overheating of the economy, making it possibly too early to cut rates.

If the data shows a clear direction before September, the decision may be relatively easy: if inflation is stubborn and economic growth is strong, interest rate cuts could be delayed; if the economy clearly weakens, there would be reason to lower the Interest Rate. However, if the current state of ambiguity continues, Powell will have to face a more difficult choice.

Richard Clarida, who served as Powell's deputy and was appointed by Trump, stated:

If the data continues to evolve at the current pace, it will become very tricky—neither enough to unambiguously cut rates nor good enough to declare victory. Therefore, a more likely scenario than some might imagine is that Powell simply stands pat, keeping the interest rate unchanged in the six remaining policy meetings of his term.

(The above content is from the "Fed's megaphone" Nick Timiraos)