By Michael S. Derby and Cynthia Kim
(Reuters) -Federal Reserve Governor Christopher Waller said on Monday that interest rate cuts remain possible later this year even with the Trump administration’s tariffs likely to push up price pressures temporarily.
Given that a rise in inflation pressures tied to President Donald Trump’s import tax increases is unlikely to be persistent, “I support looking through any tariff effects on near term-inflation when setting the policy rate,” Waller told a gathering in Seoul, South Korea.
If tariffs settle in the lower end of the range of possibilities and “underlying inflation continues to make progress to our 2% goal” with a still “solid” job sector, “I would be supporting ‘good news’ rate cuts later this year,” Waller said.
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 needing to decide what the central bank should do with interest rates.
Waller’s comments on the outlook for the economy and monetary policy hew close to his recent comments and come amid considerable uncertainty about the president’s trade policy.
Trump has made large and unpredictable shifts in tariff rates as well as their timing. At the same time, the tariff system is facing legal challenges that could ultimately blunt the entire endeavor.
Economists and Fed officials generally believe the tariffs will push up unemployment and inflation while slowing growth. The tax increases have also called into question whether the central bank will be able to deliver any cuts to what is now a federal funds target rate range of between 4.25% and 4.5% this year.
Waller’s openness to cutting interest rates later this year if economic conditions allow it contrasts with other central bankers, who have taken a cautious wait-and-see attitude.
NEAR-TERM TURBULENCE
The economy has thus far seen very little impact from tariffs, but that could change, Waller said.
“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,” Waller said.
“Higher tariffs will reduce spending, and businesses will respond, in part, by reducing production and payrolls,” he said.
The Fed official said while tariffs will be the main driver of inflation, they are likely to be one-time increases “most apparent in the second half of 2025.” In the case of more modest duties in the range of 10%, some portion of the rise will not be fully passed through to consumers.
