Fed’s Waller Outlines Path to Rate Cuts Later This Year
Federal Reserve Governor Christopher Waller said he continues to see a path to interest-rate cuts later this year amid his expectations that tariffs will boost unemployment and temporarily increase inflation.
Waller said tariffs will raise inflation in the “coming months,” but he supports looking through any near-term rise in price growth when setting policy as long as inflation expectations remain anchored.
“Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2% goal, and that the labor market remains solid, I would be supporting ‘good news’ rate cuts later this year,” Waller said in remarks prepared for a Bank of Korea conference in Seoul on Monday.
Waller referenced a speech he gave in mid-April, in which he outlined two scenarios for how trade policy may unfold.
His “large-tariff” scenario assumed an average trade-weighted tariff on goods of 25% that remained in place for “some time.” The “smaller-tariff” scenario assumed a 10% average tariff, and that higher country and sector-specific duties would be negotiated lower over time.
In both scenarios, Waller expects the impact of tariffs on inflation would be temporary. He also anticipates the levies will cause an increase in the unemployment rate that will “probably linger.” That said, job cuts would likely be “modest,” he said, under the smaller-tariff option.
“Reported progress on trade negotiations since that speech leaves my base case somewhere in between these two scenarios,” Waller said. He now estimates a 15% trade-weighted tariff on goods imports.
Inflation Expectations
Waller largely dismissed a 2025 surge in the University of Michigan’s gauge of consumers’ inflation expectations over the next five to 10 years. He said he prefers to look at market-based measures of inflation compensation and professional forecasters’ expectations, which have not seen a similar increase.
Waller said the “strong” labor market and recent progress toward the Fed’s 2% inflation goal offer policymakers time to see how trade negotiations unfold, echoing many of his colleagues.
Fed officials have largely indicated rates are in a good place to gain further clarity on President Donald Trump‘s policies — particularly tariffs — and their impact on the economy before adjusting borrowing costs.
Waller underscored that considerable uncertainty remains around the ultimate level of duties imposed on other countries and sectors. Trump announced Friday that he would be increasing tariffs on steel and aluminum to 50%, from 25%.
“As of today, 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,” Waller said.
Source: Bloomberg
