Federal Reserve Governor Christopher Waller suggested on Monday that interest rate cuts could still be possible later this year, even though President Donald Trump’s tariffs may temporarily increase price pressures. Speaking at a gathering in Seoul, South Korea, Waller emphasized that any rise in inflation caused by tariffs is expected to be short-lived, supporting his view of considering potential rate cuts if underlying inflation progresses toward the Fed’s 2% target.
Waller’s Optimistic View on Rate Cuts
Despite ongoing tariff impacts, Waller voiced his support for possible interest rate cuts if economic conditions align. He pointed out that if tariffs settle at lower levels and inflation continues to decrease, with a strong labor market, “I would be supporting ‘good news’ rate cuts later this year,” he said. This stance reflects his belief that short-term inflation pressures from tariffs may not pose a long-term threat to economic stability.
The Role of Tariffs in Economic Policy
Waller’s comments come amidst considerable uncertainty about the Trump administration’s evolving trade policy, which has seen dramatic shifts in tariff rates and timing. While tariffs have had limited impact on the economy so far, Waller noted that the second half of 2025 could bring more risks for inflation and employment due to trade policies. He explained, “Higher tariffs will reduce spending, and businesses will respond, in part, by reducing production and payrolls.” However, Waller reassured that the increase in inflation would be a one-time effect.
Uncertainty in Economic Outlook
As the economy faces challenges from trade policy, Waller stressed that the outlook remains fluid. The Federal Reserve’s decision-making process will depend on how trade policy develops, and how tariffs evolve will strongly impact inflation expectations. Waller also expressed concerns about a “large” tariff scenario, but noted that risks had decreased as the U.S. shifted away from the most aggressive tariffs.
Inflation Expectations and Market Response
Waller acknowledged the anxiety around inflation expectations, drawing comparisons to the inflation situation during the pandemic, where early predictions of transitory price pressures were proven wrong. However, he noted that the current factors driving inflation are different, and he has observed more stable inflation expectations from market participants and professional forecasters. His comments align with a general sense of cautious optimism that inflation will remain contained moving forward.
Impact on U.S. Borrowing Costs and Foreign Investment
Waller also addressed concerns over rising bond yields, which have been influenced by fears of increased government borrowing and the trade policies under Trump. He pointed out a growing “risk-off” sentiment among foreign investors, particularly regarding U.S. assets such as Treasury bonds. “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,” Waller said.
