At least one Federal Reserve official is willing to "look through" the inflationary impacts of ultra-high tariff policies, even at the risk of repeating the central bank's mistakes of 2021.
Fed Gov. Christopher Waller said Monday afternoon that he is preparing for a range of potential outcomes as the Trump administration hashes out its
Still, Waller said, it would take more than a sudden spike in prices to convince him that the Fed needs to raise interest rates.
"Yes, I am saying that I expect that elevated inflation would be temporary, and 'temporary' is another word for 'transitory,'" Waller said. "Despite the fact that the last surge of inflation beginning in 2021 lasted longer than I and other policymakers initially expected, my best judgment is that higher inflation from tariffs will be temporary. If this inflation is temporary, I can look through it and determine policy based on the underlying trend."
In 2021, the Fed deemed the spike in inflation after the COVID-19 pandemic to be a transitory phenomenon resulting from global supply chain bottlenecks. The interpretation delayed the central bank's response to the uptick in prices. Yet, Waller said that episode is not a reason to ignore the historical record on exogenous price shocks.
"I can hear the howls already that this must be a mistake given what happened in 2021 and 2022," he said. "But just because it didn't work out once does not mean you should never think that way again."
Waller's comments come at a time of elevated uncertainty, both for the U.S. economy and the outlook on monetary policy. As markets, businesses and consumers all try to make sense of President Donald Trump's vacillating
During his remarks, delivered in front of the Certified Financial Analysts Society of St. Louis, Waller outlined two potential scenarios and how they would impact his expectations for monetary policy.
In the "large tariff" scenario, the effective average trade-weighted levy remains at its current level of 25% after the 90-day pause on the so-called reciprocal tariffs announced earlier this month. Waller said this would likely cause the Fed's preferred inflation index to rise from 2.7% to between 4% and 5% by the end of the year. But, as long as longer-term inflation expectations remain around 2%, he said, he would expect that rate to come down gradually over time.
Meanwhile, he said, higher import prices — along with diminished export opportunities should other countries retaliate — would likely slow economic growth and lead to job losses. He said the unemployment rate, currently at 4.2%, would rise to 5% by next year, then potentially continue to rise "significantly." Because he would expect these losses in growth and productivity to be more long-lasting than rapid price growth, he said his bias would be toward easing monetary policy.
"While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy," Waller said. "If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC's policy rate sooner, and to a greater extent than I had previously thought."
While Waller's assessment is far from a binding commitment to support a rate cut, it does stand out for its clarity. Most other monetary policymakers have hedged their commentary around the potential for economic growth to slow at the same time as prices rise — often referred to as stagflation.
"That's the iron triangle of uncertainty that we need to sort out now," Goolsbee said at a speech at the Economic Club of New York.
Federal Reserve Bank of Minneapolis President Neel Kashkari similarly said that
"In my view, the hurdle to change the federal funds rate one way or the other has increased due to the tariffs," Kashkari wrote
For his "smaller tariff" scenario, which sees the average tariff rate fall to 10% — still well above the roughly 2.5% rate in place coming into this year — Waller said inflation would likely increase minimally, climbing to roughly 3%. The impacts of this could still be significant, but less long-lasting and therefore less worthy of a monetary response.
"In such a scenario, the outlook for monetary policy might not look much different than it did before March 1," he said. "With a fairly small tariff effect on inflation, I would expect inflation to continue on its path down towards our 2% target. In this case, 'good news' rate cuts are very much on the table in the latter half of this year."
Waller called the tariff changes "one of the biggest shocks to affect the U.S. economy in many decades," with a wide range of potential outcomes. Policymakers must be flexible in how they approach this situation, he said, but added that he is confident the country is sound enough to weather an economic storm.
"In the end, the United States is a dynamic, resilient capitalist system that responds well to shocks and always has," he said. "I suspect that will continue to be the case now."
