Christopher Waller, a member of the Federal Reserve’s board of governors, painted a stagflationary picture of President Trump’s tariff agenda Monday, arguing that the hit to economic growth could be more significant than the upward pressure on prices.
He said he expects the price effect of the tariffs to be “temporary” and that interest rate policy could be more responsive to output and employment effects.
“While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy,” he said in a speech Monday to financial analysts in St. Louis.
Waller said a recession could be one of the outcomes of Trump’s new tariff policies. Such an outcome would likely trigger more interest rate cuts at a quicker pace.
“If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the [Fed’s] policy rate sooner, and to a greater extent than I had previously thought,” Waller said.
Trump’s tariff agenda has been rolled out in a stop-and-start manner, with markets enduring a period of intense volatility and forecasters changing their predictions day to day.
Trump exempted some major electronics producers from Chinese tariffs over the weekend while previewing additional tariffs on semiconductors that he said would be announced sometime this week.
Trump announced “reciprocal” tariffs on dozens of countries on April 2, which he termed “Liberation Day.” He then paused those for 90 days while jacking up tariffs on China to a rate of 145 percent. He also imposed a general tariff of 10 percent on imports to the U.S.
China responded by increasing its tariff rate on the U.S. to 125 percent, increasing tension between the world’s two largest economies that are now stuck in a standoff.
The Fed cut interest rates through the fourth quarter of last year. In January and March, the Fed paused its rate cuts after inflation ticked back up toward 3 percent and employment registered strong readings in consecutive job reports.
The Trump administration’s tariffs have thrown a new variable into the Fed’s calculations about where to put interest rates. Fed Chair Jerome Powell has said the tariffs would slow progress against inflation as central bankers hope to see it move down toward a 2 percent annual increase.
“Under the large tariff scenario, economic growth is likely to slow to a crawl and significantly raise the unemployment rate. I do expect inflation to rise significantly, but if inflation expectations remain well anchored, I also expect inflation to return to a more moderate level in 2026,” Waller said Monday.