The governor of the Federal Reserve, Christopher Waller, raised two scenarios on how the commercial policy of President Donald Trump could affect the US economy, But he said that the inflationary impact of any of them would probably be temporary.
Waller described the new tariff policy as “One of the greatest shocks that have affected the US economy in many decades”in comments prepared for an event in St. Louis on Monday.
“The future of that policy, as well as its possible effects, remains very uncertain”he said. “This also makes the panorama very uncertain and demands that the political leaders maintain the necessary flexibility to consider the wide range of results.”
Trump’s tariff ads have changed repeatedly, shaking the markets and economists who seek to measure their potential economic effects.
On April 2, Trump announced generalized tariffs to United States business partners. Since then, he has proclaimed a 90 -day break in the so -called reciprocal tariffs, while maintaining a base global 10%base tariff. China faces tariffs far from 100%.
Waller raised two scenarios on how tariff policy could evolve And he detailed how Fed’s policy should respond in each of them.
In the first, He assumed a scenario of high tariffs, in which the average tariffs of about 25% remain in force for a while. In the second, he described a lower tariff situation, in which a minimum general tax of 10% on the goods of all countries is maintained and other tariffs are eliminated over time.
Great vs. Little
In the first scenario, economic growth would probably slow down “until almost stopped” And unemployment would increase significantly, he said.
Inflation would also significantly increase in that situation, he said, potentially reaching a peak close to 5% annualized In the coming months if companies quickly and completely move the cost of rates.
Even so, Waller said inflation would return to a more moderate level in 2026provided that the expectations of Americans about price growth remain well anchored.
“Although the last sudden increase in inflation, which began in 2021, lasted more than me and other political leaders initially expected, My best judgment is that the increase in inflation caused by tariffs will be temporary, “Waller said.” If this inflation is temporary, I can analyze it and determine the policies based on the underlying trend. “
“If the deceleration is significant and even threatens with a recession, then I would expect to be in favor of cutting the FOMC policy rate beforeand to a greater extent of what he had previously thought, “he added, referring to the Federal Open Market Committee that sets interest rates.
In the second scenario, Waller estimated that the effect on inflation would be much lower, reaching a maximum of about 3% annualized. While there would be a negative effect on economic production and employment growth, this would be less than in the first scenario, he said.
“As a result of these limited effects on inflation and economic activity derived from the constant decrease of tariffs, it would support a limited monetary policy response,” affirmed. “Anchored or even lower inflation expectations as the economy slows down, added to the opinion that the lower tariff effects are temporary, give the FOMC margin to adjust the policy as price data reveal advances in the underlying trend of inflation.”
If there were a small tariff effect on inflationrates cuts would be “very” on the table for the second half of 2025, he said.
