Federal Reserve Governor Christopher Waller said that even if new tariffs lead to inflation, interest rate cuts could still be considered in 2025. While speaking in Seoul, South Korea, Waller stated that even short-term inflation linked to tariffs may not impact the Fed's choice to ease up if the rest of the economy allows such a change.
He emphasized the importance of closely monitoring inflation and labor market trends. Waller thought it would be appropriate to reduce rates if inflation moves to 2% as aimed for and the labor market remains solid. The current federal funds target rate has been between 4.25% and 4.5%.
Waller pointed out that because the new tariffs have flexible start times and changing rates, forecasting their overall influence is hard. He called the increased inflation from these changes temporary and advised the central bank not to make hasty changes based on short-term changes in the data.
The governor noted that an increase in tariffs might lower consumer spending and prompt businesses to adjust their output and staffing levels. He said that actions like these could slow economic activity down while increasing inflation, mainly in the final months of 2025. He thinks inflation might rise slightly, but only once, because consumers can cope with the tariffs that are not very substantial.
He acknowledged that the 2021 case of underestimating the length of inflation could recur if the policy is incorrect. Waller explained that the present economic situation is quite different from what it was during the pandemic. He indicated that the Federal Reserve would proceed cautiously, as trade talks and events outside the United States could develop in unexpected ways over the next few months.
In addition to inflation and job growth, Waller was concerned that interest from foreign countries in U.S. assets was declining. He noticed that international investors were looking more strongly at investing in US Treasury securities. Although Wall admitted that the changes are modest at present, he sees them as having the potential to impact capital markets if they keep happening.
Some were also concerned because there was a growing perception that foreigners are less welcome in the US financial sector. The statement reveals that investors are increasingly considering major policy and global risks that could shape longer-term investment patterns and confidence. With every passing month, markets will pay close attention to the Fed's policies and adjustments in response to new developments in international trade and inflation.