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

Pablo Piovano FXStreet

Federal Reserve (Fed) Governor Christopher Waller said the Trump administration's tariffs posed a significant shock to the United States (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 is one of the biggest shocks to affect the 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 a 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%.

Author

Pablo Piovano

FXStreet

Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.

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