Federal Reserve Governor: The impact of tariffs on inflation is temporary, and if the inflation impact is small, a rate cut may occur later this year

Federal Reserve Governor Christopher Waller stated at an event in St. Louis, USA on Monday that the inflation impact of Trump's trade policies on the U.S. economy may be temporary. He mentioned that if the tariffs have a minimal effect on inflation, the Federal Reserve is "very likely" to consider interest rate cuts in the second half of 2025.

According to media reports, Waller said in his speech that the new tariff policy is "one of the largest shocks to the U.S. economy in decades."

"The future direction of this policy, and its potential impacts, remain highly uncertain. This also makes the economic outlook extremely uncertain, requiring policymakers to remain flexible when considering various possible outcomes."

According to Xinhua News Agency, the U.S. government has recently abused tariff measures, imposing additional so-called "reciprocal tariffs" on global trading partners, including China, which has faced strong dissatisfaction domestically and internationally, leading to significant turmoil in financial markets. The government has temporarily suspended high "reciprocal tariffs" on some trading partners but still maintains a 10% "baseline tariff" on these countries and regions, along with a 125% high tariff on China.

Waller outlined two potential scenarios for high and low tariff policies and explained how the Federal Reserve should adjust its policies in each scenario.

High Tariff Scenario

In the first "high tariff" scenario, Waller assumes an average tariff of about 25% maintained over a long period. He stated that in this case, economic growth could "almost stagnate," and the unemployment rate would rise significantly.

He also pointed out that inflation would rise sharply in this scenario, and if businesses quickly and fully pass on the tariff costs, the annualized inflation peak in the coming months could approach 5%.

However, Waller believes that as long as Americans' expectations for future price increases remain stable, inflation will return to more moderate levels by 2026.

He stated:

"Although the duration of the last round of inflation that began in 2021 exceeded my and the Federal Reserve policymakers' initial expectations, my best judgment at this time is that the higher inflation triggered by tariffs will be temporary. If this inflation is temporary, I can ignore it and decide on policy based on underlying trends."

"If the economic slowdown is severe enough to even threaten a recession, then I expect to support lowering the Federal Open Market Committee (FOMC) policy rate earlier and more significantly."

Low Tariff Scenario

In the second "low tariff" scenario, Waller assumes that the U.S. maintains a uniform baseline tariff of 10% on goods from all countries, with other tariffs gradually eliminated over time.

Waller stated that in this case, the impact on inflation would be much smaller, with an annualized inflation peak of about 3%. Although this would still negatively affect economic output and employment growth, the extent of the impact would be far less than in the first scenario Waller said:

"Given the limited impact of this gradual reduction in tariffs on inflation and economic activity, I will support limited monetary policy responses. As the economy slows, if inflation expectations remain stable or even decline, combined with the judgment that the smaller tariff effects are temporary, this will provide room for the FOMC to adjust policy when price data reflects progress in underlying inflation trends."

Waller finally stated that if the impact of tariffs on inflation is small, the Federal Reserve is 'very likely' to consider interest rate cuts in the second half of 2025.