U.S. Federal Reserve Governor Christopher Waller indicated on Monday that interest rate cuts could still be considered later this year, even as new tariffs introduced under former President Donald Trump risk pushing inflation higher in the short term.
Speaking at an event in Seoul, South Korea, Waller said he is inclined to “look through” the near-term inflationary effects of tariffs when assessing interest rate policy. He noted that any price pressures from Trump’s recent import duties would likely be temporary, according to a report by Reuters.
“If tariff levels remain modest, underlying inflation continues progressing toward our 2% goal, and the labor market stays solid, I would be supportive of rate cuts this year,” Waller stated. He added that encouraging inflation data through April and a resilient labor market provide “additional time to see how trade negotiations evolve and how the economy responds.”
Tariffs Add Uncertainty to Economic Outlook
Waller’s comments come amid heightened uncertainty surrounding U.S. trade policy, with Trump’s tariff announcements featuring varying rates and rollout timelines. The legal durability of these measures also remains in question, adding further unpredictability to their long-term impact.
The Federal Reserve’s current target range for the federal funds rate stands between 4.25% and 4.5%. Waller acknowledged that the shifting trade environment introduces both downside and upside risks to the economic outlook, particularly in the second half of 2025.
“I see downside risks to economic activity and employment, and upside risks to inflation,” he said, emphasizing that the path of trade policy will be a critical factor in how those risks materialize.
Short-Term Inflation Spike Anticipated
Waller warned that higher tariffs could reduce consumer spending and prompt businesses to cut production and payrolls. He predicted a temporary inflation spike, particularly in late 2025, though consumers would likely absorb only part of the increase resulting from modest tariffs.
He also addressed concerns over repeating past policy mistakes. “People are understandably cautious because we made similar assumptions in 2021—that inflation pressures were transitory—and that didn’t hold up,” Waller admitted. However, he stressed that the current environment is significantly different from the COVID-era conditions that led to those misjudgments.
Investor Sentiment Toward U.S. Debt Weakening
Turning to financial markets, Waller noted a subtle but growing “risk-off” sentiment among foreign investors toward U.S. government debt. “There’s a definite attitude shift—foreign buyers of Treasuries and U.S. assets seem less welcome, at least in perception,” he said.
This cautious tone highlights broader concerns over the fiscal direction of the U.S. government and its impact on investor confidence.
Waller’s remarks suggest that while inflation remains a concern, the Fed may still have flexibility to lower interest rates if trade-driven inflation proves short-lived and the economy continues to show signs of resilience.
