In a speech delivered Monday in Seoul, South Korea, Federal Reserve Governor Christopher Waller expressed cautious optimism that interest rates could be lowered later this year, despite the inflationary risks posed by new tariffs announced by the Trump administration. Waller urged monetary policymakers to “look through” temporary price increases that stem from tariff actions when deciding the appropriate path for the federal funds rate.
Waller acknowledged that tariffs will introduce headwinds for the economy. He said higher import costs are likely to reduce spending and production, dampen employment growth in affected sectors, and push some prices higher. Still, he described these effects as mostly one-time increases concentrated in the second half of 2025 rather than a persistent rise in inflation driven by domestic demand. That distinction, he argued, should shape the Fed’s response.
At present, the federal funds rate target sits in a range between 4.25% and 4.5%. Waller said that if underlying measures of inflation continue to improve and the labor market remains robust, the central bank will have room to implement cautious rate cuts. He emphasized that such reductions would depend on incoming data and that any decision would reflect the balance between containing inflation and supporting employment.
His remarks stood in contrast to those of several Fed colleagues who have urged a more cautious, wait-and-see stance in light of ongoing trade-policy uncertainty. Whereas some officials have highlighted the risks that tariffs could feed into broader inflation expectations or require more restrictive policy, Waller focused on the temporary and targeted nature of the price effects he expects. He reasoned that modest tariff rates—on the order of 10%—are unlikely to be fully passed through to consumer prices and therefore should not automatically prompt a tightening of policy.
Waller also pointed to the economy’s current resilience as a reason for measured confidence. Strong labor-market indicators and continued consumer spending give the Fed more flexibility to distinguish between transitory cost shocks and persistent demand-driven inflation. If wage growth and core inflation trends continue to slow toward target, Waller suggested, policymakers could responsibly begin easing monetary policy to support ongoing expansion without risking a renewed uptick in inflation.
That view, however, comes with caveats. Waller reiterated that his outlook depends on future data: if tariffs lead to broader price-setting behavior, sustained increases in inflation expectations, or larger-than-anticipated spillovers to wages and production, the Fed would need to reconsider its approach. He framed his recommendation as conditional and data dependent rather than a fixed prescription.
Overall, Waller’s message to markets and to fellow policymakers was one of cautious optimism. He advocated looking through discrete, tariff-driven price shocks when appropriate, while remaining prepared to act if those shocks proved to be more persistent. The speech underscored the ongoing balancing act facing the Federal Reserve as it weighs the competing goals of price stability and maximum employment amid evolving trade-policy developments.