Federal Reserve "hotshot" Governor Waller: Sees no evidence of long-term inflation rising, still expects rate cuts later this year

Federal Reserve Governor Waller recently stated that he still believes there is a possibility of interest rate cuts later this year, as he expects tariffs to raise unemployment and temporarily push up inflation.

On June 2, Bloomberg reported that Federal Reserve Governor Christopher Waller, speaking at a Bank of Korea meeting in Seoul, indicated that tariffs would raise inflation in the "coming months," supporting the notion that as long as inflation expectations remain stable, short-term price increases can be ignored in policy-making. Waller stated:

"Assuming the effective tariff rate is close to my lower tariff scenario, potential inflation continues to make progress toward the 2% target, and the labor market remains robust, it would support a 'good news' interest rate cut later this year."

The Federal Reserve Governor also noted in his speech that concerns over the fiscal deficit are increasing, which will push up long-term U.S. Treasury yields. Waller also expressed views on stablecoins, describing them as a potential tool for introducing competition into the payment system.

Inflation is Temporary

Reportedly, the Federal Reserve Governor referenced a speech he gave in mid-April, where he outlined two scenarios for how trade policy might unfold:

The "big tariff" scenario assumes an average trade-weighted tariff of 25% on goods, maintained for a period of time.

The "small tariff" scenario assumes an average tariff of 10%, with higher tariffs on specific countries and industries being gradually reduced through negotiations over time.

In both scenarios, Waller expects the impact of tariffs on inflation to be temporary. Waller stated,

"Since that speech in mid-April, progress in trade negotiations has left my baseline expectation somewhere between these two scenarios."

Waller emphasized that there remains considerable uncertainty surrounding the final levels of tariffs imposed on other countries and industries.

"As of today, I see downside risks to economic activity and employment in the second half of 2025, and upside risks to inflation, but how these risks evolve is closely related to how trade policy evolves."

He now estimates a trade-weighted tariff of 15% on imported goods.

Notably, Waller largely dismissed the surge in the University of Michigan's consumer inflation expectations index for the next 5-10 years in 2025. He stated that he prefers to focus on market-based inflation compensation measures and professional forecasters' expectations, which have not shown a similar rise.

He also expects tariffs to lead to an increase in unemployment, although this impact may be mild in the "small tariff" scenario.

Fiscal Deficit Pushes Up Long-Term Yields

In a dialogue with Bank of Korea Governor Rhee Chang-yong, Waller attributed the recent rise in long-term Treasury yields to growing concerns over the increasing U.S. fiscal deficit.

He stated that the market had previously expected some progress in fiscal consolidation, but current estimates show that the federal deficit will remain around $2 trillion in the foreseeable future, about 6% of GDP. Waller told Bank of Korea Governor Rhee:

"If the amount of debt issuance far exceeds market expectations, they will buy, but at a much lower price; the issue is not whether it can be sold, but at what price they are willing to pay." He added that recent developments in trade and geopolitics, including tariffs and signals from the White House, have intensified foreign investors' risk aversion. Some institutional buyers are reassessing their exposure to U.S. assets, which could dampen demand and push up yields.

Stablecoins May Become Competitive Tools in Payment Systems

Although Waller pointed out that he cannot speak on behalf of the U.S. government regarding legislation, he stated that stablecoins should be viewed as "just a payment tool" that can be issued by non-bank entities for transactions like deposits.

"If stablecoins can help reduce costs, especially for small and medium-sized enterprises conducting cross-border transfers, I fully support allowing competition rather than letting regulators set prices."