US Fed Governor Predicts: Trump's Tariffs Will Have a Temporary Impact on Inflation

On Monday, April 14, US Fed Governor Waller stated that the impact of US President Trump's tariff policies on inflation is likely to be temporary. Waller spoke about the economic outlook at an event in St. Louis on Monday, describing Trump's tariff policies as "one of the most significant shocks to the US economy in decades." "The future direction of this policy and its potential impact remain highly uncertain," Waller said. "This also makes the economic outlook uncertain, requiring policymakers to remain flexible when considering various possible outcomes." Regarding how Trump's trade policies will affect the US economy, Waller proposed two scenarios, but he believes that in both cases, the impact of tariffs on inflation will only be temporary. Additionally, he stated that the US Fed is likely to cut interest rates in both scenarios. This view contrasts sharply with recent remarks from other US Fed officials, who believe that tariffs could lead to a resurgence in inflation. Trump's erratic tariff policies have made it difficult for markets and economists to assess their actual impact. On April 2, Trump announced the imposition of so-called reciprocal tariffs on almost all trading partners, causing a major shock to global financial markets. Subsequently, he announced a 90-day suspension of reciprocal tariffs for the vast majority of countries but maintained a baseline tariff of 10%. In the first scenario, Waller assumed a "high tariff" situation, where the average tariff remains at a high level of around 25%. He expects that US economic growth may "slow down," and the unemployment rate could rise significantly. Waller pointed out that if businesses quickly and fully pass on tariff costs to consumers, the annualized inflation rate could surge to nearly 5% in the coming months. However, if the US public's inflation expectations remain stable, inflation will return to mild levels by 2026. "Although the inflation that began in 2021 has lasted longer than I and other policymakers expected, I still judge that the inflation triggered by tariffs will be temporary," Waller said. "If this inflation is short-lived, I will ignore it and formulate policies based on underlying trends." He added that if the economic slowdown is severe, even risking a recession, he would be inclined to support "earlier and more aggressive" interest rate cuts. Waller also stated that if the US Fed faces both a rapid economic slowdown and persistently high inflation, the risk of recession would outweigh the risk of escalating inflation. In the second scenario, Waller described a "low tariff" situation, where the US imposes at least a 10% tariff on goods from all countries but gradually eliminates other tariffs over time. In this case, the inflation peak would be around 3%, and the impact on economic output and employment growth would be smaller than in the first scenario. "Given the limited impact on inflation and economic activity, I would support a limited monetary policy response," Waller said. "If inflation expectations remain stable or even decline against the backdrop of an economic slowdown, and the impact of lower tariffs is seen as temporary, the US Fed will have room to adjust policies based on inflation trends reflected in price data." He said that if the impact of tariffs on inflation is relatively small, it is very likely that interest rates will be cut in H2 2025.