Fed’s Waller Sees Possible Rate Cuts This Year Despite Tariff-Driven Inflation
Washington D.C. – Federal Reserve Governor Christopher Waller stated on Monday that interest rate cuts remain a possibility later this year, even as the Trump administration’s tariff regime is expected to temporarily increase price pressures.
Speaking in Seoul, South Korea, Waller indicated that the Fed should “look through any tariff effects on near-term inflation” when setting monetary policy, given that such price increases are likely to be short-lived. He clarified that if tariffs remain on the lower end of projected possibilities, and if “underlying inflation continues to make progress to our 2% goal” alongside a “solid” job market, he would support “good news” rate cuts in the latter half of 2025.
Waller noted that the strong labor market and continued progress on inflation through April provide the central bank with “additional time to see how trade negotiations play out and the economy evolves” before a definitive decision on interest rates is needed.
Navigating Trade Policy Uncertainty
Waller’s comments align with his recent statements on the economy and monetary policy, coming amidst considerable uncertainty surrounding the President’s trade strategy. Trump’s tariff rates have been large and unpredictable, both in size and timing, and the entire tariff system faces ongoing legal challenges that could ultimately undermine its implementation.
Economists and many Fed officials generally anticipate that tariffs will lead to higher unemployment, increased inflation, and slower economic growth. These import taxes have also cast doubt on whether the central bank will be able to deliver any rate cuts from the current federal funds target range of 4.25% to 4.5% this year.
Waller’s openness to potential rate cuts, if economic conditions permit, contrasts with some other central bankers who have adopted a more cautious “wait-and-see” approach. He acknowledged that while tariffs have had minimal economic impact so far, this could change, stating: “I see downside risks to economic activity and employment and upside risks to inflation in the second half of 2025, but how these risks evolve is strongly tied to how trade policy evolves.” He elaborated that “Higher tariffs will reduce spending, and businesses will respond, in part, by reducing production and payrolls.”
Regarding inflation specifically, Waller believes that while tariffs will be the main driver of price increases, these are likely to be “one-time” adjustments, most apparent in the latter half of 2025. He added that if duties are more modest, around 10%, some of the cost increase may not be fully passed on to consumers. Waller also noted that the risk of a “large” tariff scenario has diminished.
Finally, Waller addressed divergent inflation expectations, stating he prioritizes market views and professional forecasts, which largely suggest contained price pressures, over survey data. He also observed that real-world data does not indicate significant deterioration in the expected path of inflation.
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