Fed’s Waller: Tariffs are the biggest shock to affect US economy

Fed Governor Christopher Waller said the Trump administration's tariffs posed a significant shock to the US economy that might force the Fed to cut rates to avert a recession, though they could also be just a negotiating tactic with minimal lasting impact.

Key Highlights

• New tariff policy one of the biggest shocks to affect US economy in decades.
• I believe higher inflation from tariffs will be temporary.
• If current 25% average tariff rate stays for some time, inflation could peak near 5%.
• In this large-tariff scenario, drag on output, employment could be longer-lasting; unemployment could rise to 5%.
• Under large-tariff scenario with significant economic slowdown, I'd favour cutting policy rate sooner and more than previously thought.
• In scenario where tariffs drop down to 10%, inflation could peak at 3%.
• Under 10% avg tariff, would see limited effects on economic activity; I would support a limited monetary policy response.
• Under smaller-tariff scenario fed could be more patient, rate cuts could take place in latter half of the year.
• Policy highly uncertain, Fed should remain flexible.
• Partial tariff suspensions may have widened the range of possible outcomes, made timing less certain.
• Inflation expectations have not become unanchored, expect inflation to return to more moderate level in 2026.
• Monetary policy is meaningfully restricting economic activity, hope underlying inflation will continue to moderate.
• In Q1, economy was growing modestly, labor market solid, inflation too high but making slow progress.
• March PCE 12-month inflation likely was 2.3%, core PCE likely was 2.7%.