By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – Two Federal Reserve officials seen as representing contrasting sides of the policy spectrum said on Friday they’ll be watching the impact of Trump administration policies on inflation as they assess how much further interest rates should fall.

In separate comments, Fed Governor Michelle Bowman and Chicago Fed President Austan Goolsbee both voiced an underlying faith that inflation is likely to continue to decline this year and allow further rate cuts, even if the timing is uncertain.

But both said policies expected from the Trump administration have added uncertainty about the path of inflation and therefore the path of the Fed’s policy rate.

Bowman is widely seen as representing the hawkish side of the Fed policy spectrum, more concerned about inflation, while Goolsbee has expressed more concern over the job market, though both are committed to the Fed’s 2% inflation target.

Expected Trump policies have included potential limits on labor supply through deportation of immigrants and higher prices through import taxes.

Administration officials have said they don’t think tariffs will add to inflation, and indeed the Fed during Trump’s first term ended up cutting its policy interest rate after growing concern that his tariff and trade actions were slowing economic growth.

The economy is now in a different place, however, with memories of the pandemic inflation shock still recent, output and employment considered at or beyond capacity, and businesses having shown a willingness to at least try to pass along higher costs.

Bowman, appointed to the Fed by Trump in his first term, said in remarks to a New England business group that she supported the Fed’s decision this week to hold the policy rate of interest rate steady in the range of 4.25% to 4.5% in order to be sure inflation will continue to improve and gain more certainty about the administration’s plans.

Along with watching incoming official statistics on inflation and jobs, Bowman said the central bank should move gradually now “to get clarity on the administration’s policies and their effects on the economy.

“It will be very important to have a better sense of the actual policies and how they will be implemented, in addition to greater confidence about how the economy will respond,” Bowman said.

Investors currently expect the Fed to reduce its policy rate by a quarter of a point at its June meetings and again later in the year.

Bowman said she sees risks that inflation may prove stronger than expected, with ongoing economic growth, rising wages, geopolitical risks, and financial markets and business sentiment that may unleash pent up demand.

“I would prefer that future adjustments to the policy rate be gradual. We should take time to carefully assess the progress in achieving our inflation and employment goals,” Bowman said. “I continue to be concerned that easier financial conditions over the past year may have contributed to the lack of further progress on slowing inflation,” she said, while adding that current interest rates may not be all that restrictive.

Both Bowman and Goolsbee are voters on interest rate policy and their comments showed the common dilemma faced by U.S. central bankers right now — how to make policy for an economy that has been in a sweet spot of good growth, falling inflation, and low unemployment for a year, but now faces a period of potentially dramatic change in federal policies.

Goolsbee, a top economic adviser in the Obama administration, said he still felt inflation would ease this year and allow the Fed’s main interest rate to continue to be reduced.

Unlike Bowman he did not point to immediate upside risks to inflation, but focused on new data released Friday showing that recent monthly readings of inflation have been running close to the central bank’s 2% target, which he expects to continue.

“Look at six, eight months, we are coming in right at 2%,” said Goolsbee. “I have felt like we are on path to 2%. I have comfort that we are on that path.”

At the same time “we have this policy uncertainty that might effect prices…If it effects prices it effects us,” Goolsbee said, noting that tariffs and other actions could create a “muddied” outlook where policymakers will have to sort out price influences that could be persistent from those that can be ignored as one time adjustments.

“It is not obvious monetary policy should react,” he said. “The difficulty we have is if policy is going to be raising prices we are going to have to figure out which part of inflation monetary policy should look through and which is a sign of the economy” generating more intense price pressure.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama, Andrea Ricci, Peter Graff)

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