Federal Reserve still eyes rate cuts amid tariff risks

Federal Reserve Governor Christopher Waller said on Monday that the Fed could still lower interest rates before the end of the year, even though President Donald Trump’s tariffs might push up prices for a short time.

Speaking at an event in Seoul, South Korea, Waller noted that any uptick in inflation caused by the new import taxes is likely to be brief, as mentioned in a Reuters report. “I support looking through any tariff effects on near-term inflation when setting the policy rate,” he said.

Waller explained that if the duties end up near the lower end of possible levels and “underlying inflation continues to make progress to our 2% goal” while the job market remains “solid,” he would back “good news” rate cuts later this year.

He added, “Fortunately, the strong labor market and progress on inflation through April gives me additional time to see how trade negotiations play out and the economy evolves” before the Fed must make a decision on rates.

His remarks mirror what he has said in recent weeks, coming at a time of considerable uncertainty around Trump’s trade strategy. The president has made large, unpredictable changes to tariff rates and their timing, and the entire tariff program faces legal challenges that could undermine its goals.

Many economists and Fed officials believe the tariffs will wind up pushing unemployment higher and inflation up while slowing economic growth.

These import taxes have also raised doubts about whether the Fed will be able to lower its current federal funds rate, which sits between 4.25% and 4.50%, before year-end.

Tariffs will drive near-term inflation rise, but it will be short-lived

Waller’s openness to cutting rates if the economy allows stands in contrast to other central bank officials who have been more cautious, choosing to wait and see. He did caution that the economy has so far felt little impact from tariffs, but that could change.

“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,” he said. Waller pointed out that higher tariffs will reduce spending, and businesses will respond “in part by reducing production and payrolls.”

He said tariffs will be the main driver of any near-term inflation rise, but those price jumps would likely be one-time events, “most apparent in the second half of 2025.”

If duties remain at a more modest level, around 10%, he believes some of the cost increases won’t fully be passed on to consumers. He also noted that the odds of facing a “large” tariff scenario have fallen.

Waller said some of the worry about inflation stems from missteps during the pandemic, when many expected rising prices to be temporary.

“What often has people spooked is we had the same view in 2021, that all this stuff was transitory, it was a one-time level effect, and then it would all go away,” he remarked. “And that just turned out to be wrong.” However, he pointed out that the factors that made inflation stick around back then are not present today.

On the question of inflation expectations, Waller said he places more weight on what markets and professional forecasters predict rather than opinion surveys. Real-world data, he added, have not shown much change in the expected path of inflation. Waller turned to the recent rise in bond yields, which came amid growing caution toward dollar-denominated assets due to Trump’s trade actions.

He said higher borrowing costs are tied to concerns about growing government debt and questions about how open the U.S. is to foreign investment. “There seems to be an attitude that foreign buyers of assets are not welcome in some sense,” he said, referring to certain government statements.

“There’s been a risk-off attitude from foreign buyers of Treasuries, all U.S. assets … It’s not really that big, but it’s definitely there,” he added.

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