Fed's Christopher Waller Signals Caution On Rate Cut Amid Tariff-Driven Inflation Risks

Federal Reserve Governor Christopher Waller warned that tariff-induced inflation could temporarily push prices higher while signaling potential rate cuts later in 2025, contingent on trade policy clarity and economic stability.

What Happened: Speaking at the Bank of Korea International Conference in Seoul on Sunday, Waller outlined two tariff scenarios that could drive inflation to peaks between 3-5% this year. His base case now assumes a 15% trade-weighted tariff on U.S. goods imports, falling between his previously modeled large and smaller tariff scenarios.

The governor’s cautious stance comes as President Donald Trump recently summoned Fed Chair Jerome Powell to the White House, telling him he was “making a mistake” by not cutting rates. The Federal Reserve Board maintained rates at 4.25%-4.50% for the third consecutive meeting, with officials citing increased economic uncertainty.

The Fed governor dismissed concerns about inflation persistence, citing key differences from the 2021-2022 period. Unlike the pandemic era’s labor shortages, supply chain disruptions, and massive fiscal stimulus, current conditions show no labor shortage and limited supply chain stress. Monetary policy also differs significantly, with the Fed maintaining rates above 4% versus near-zero during the pandemic.

Why It Matters: Waller highlighted diverging inflation expectations between households and financial markets. University of Michigan consumer surveys show near-term expectations at 6.6% and longer-term at 4.2%, while Treasury Inflation-Protected Securities compensation remains around 2.4-2.7%.

Financial markets currently price rate cuts beginning in September, with billionaire investor Chamath Palihapitiya flagging rising investor caution as money market fund assets hit $7.24 trillion. JPMorgan Chase & Co. CEO Jamie Dimon recently warned of stagflation risks amid deficit concerns and geopolitical tensions.

Waller concluded that assuming tariff rates settle near his lower scenario and underlying inflation progresses toward the Fed’s 2% target, he would support “good news” rate cuts later this year. The stance reflects the central bank’s data-dependent approach as trade negotiations continue and economic conditions evolve.

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