Federal Reserve Governor Chris Waller warned that sustained high tariffs imposed by the Trump administration could force the Fed to lower interest rates earlier than currently expected. Waller said tariffs strong enough to push inflation temporarily toward 5% would nonetheless present a difficult trade-off: while higher inflation might normally argue against easing policy, the accompanying hit to economic growth could make a rate cut the more appropriate response.
Waller sketched out two possible tariff paths and their likely economic consequences. In his “large tariff” scenario, average tariffs near 25% would sharply raise import prices and lift headline inflation noticeably. Even if that inflation spike proved transitory, the negative impact on real activity—slower consumer spending, disrupted supply chains, and weaker business investment—would increase the risk of a pronounced economic slowdown. In such a case, Waller said the Fed might need to act quickly with rate reductions to cushion the downturn.
By contrast, Waller described a “smaller tariff” scenario with average tariffs around 10%. Under that outcome, tariff-driven price pressures would be milder and would likely allow policymakers to respond more gradually. Modest, short-lived increases in consumer prices could be managed without abandoning the broader inflation-fighting stance, giving the Federal Reserve time to assess incoming data and calibrate its policy path more deliberately.
Throughout his remarks, Waller emphasized that tariff-related inflation would differ from demand-driven inflation. Price jumps caused by higher import costs tend to be concentrated in specific goods and may fade as firms and consumers adjust. Still, he stressed the importance of watching how trade policy affects both prices and growth. If tariffs create persistent disruptions to supply chains or meaningfully reduce aggregate demand, the Federal Reserve would need to weigh the downside to output and employment when setting its interest-rate outlook.
Waller’s comments underscore the balancing act facing central bankers: maintaining price stability while also supporting maximum sustainable employment. Tariffs that materially raise costs could complicate that mission by producing an uncomfortable combination of higher headline inflation and weaker economic activity. In such circumstances, Waller indicated, easing monetary policy sooner could be necessary to prevent a deeper slowdown, even if it meant accepting a temporary overshoot in inflation.
While his scenarios are framed around specific tariff levels, Waller made clear that actual policy decisions would depend on a broad set of incoming economic indicators. The ultimate Fed response would hinge on the persistence of price changes, the extent of any slowdown in growth and labor markets, and how monetary policy can best promote a balanced recovery. For now, Waller’s assessment signals that trade policy risks are being taken seriously in monetary-policy deliberations and could meaningfully influence the timing of future rate moves.