US Fed Governor Waller: If Core Inflation Continues to Move Toward the 2% Target, an Interest Rate Cut Is Expected Later This Year

US Fed Governor Christopher Waller said on Monday that he still believes the US Fed is likely to cut interest rates later this year, and currently expects that tariffs will push up the unemployment rate, while the upside pressure on inflation will be temporary.

Waller said that tariffs will push up inflation in the "coming months," but as long as inflation expectations remain stable, he supports ignoring any short-term price increases when formulating policies.

In remarks prepared for a speech at the Bank of Korea conference in Seoul on Monday, Waller said, "Assuming that actual tariff rates stabilize near the modest tariff scenario I envision, core inflation continues to move toward our 2% target, and the labour market remains robust, I am willing to support an interest rate cut later this year based on 'good news'."

Two Tariff Scenarios

Waller referred to a speech he gave in mid-April, in which he outlined two possible scenarios for the implementation of Trump's trade policies.

In the "high tariff" scenario, the average trade-weighted tariff on goods is assumed to be 25% and will remain in place "for some time." In the "modest tariff" scenario, the average tariff is assumed to be 10%, and higher tariffs on specific countries and industries will be negotiated down over time.

In both cases, Waller expects the impact of tariffs on inflation to be temporary.

"In both scenarios, I assume that tariff increases will lead to a one-time increase in prices, temporarily pushing up inflation, after which inflation will return to its underlying trend. This temporary rise in inflation could manifest as a rapid increase followed by a quick decline, or as a more gradual, slower rise followed by a slow pullback. It is important to emphasize that the key to this assessment lies in my assumption that long-term inflation expectations will remain stable."

He also expects that tariff hikes will lead to an increase in the US unemployment rate, and that this increase "may persist for some time." However, he anticipates that under the modest tariff scenario, the rise in unemployment may be "relatively small."

Waller said that since his April speech, trade negotiations have reportedly made progress, so his current baseline assumption lies between these two scenarios—Waller now expects a trade-weighted tariff of 15% on imported goods.

Inflation Expectations

In his latest remarks, Waller also largely dismissed the abnormal surge in the University of Michigan's consumer inflation expectations index for the next five to ten years.

He said he prefers to focus on market-based measures of inflation compensation and forecasts from professional forecasters, which have not shown a similar increase.

Waller stated that the "robust" US labour market and recent progress towards achieving the US Fed's 2% inflation target have provided policymakers with time to observe the evolution of trade negotiations, aligning with the views of many of his Fed colleagues.

Fed officials have recently expressed a general consensus that maintaining the current interest rate level before adjusting borrowing costs is conducive to further clarifying President Trump's policies and their impact on the economy, particularly the tariff policies.

Waller emphasized that there remains considerable uncertainty regarding the final tariff levels that the US government will impose on other countries and industries. Trump announced last Friday that he would raise import tariffs on steel and aluminum from 25% to 50%.

"For now, I anticipate downside risks to economic activity and employment, and upside risks to inflation in H2 2025. However, the specific evolution of these risks is closely tied to how trade policies unfold," Waller said.

After the US Fed cut interest rates by 100 basis points in the last four months of 2024, it has remained on hold so far in 2025, maintaining the target range for the federal funds rate at 4.25% to 4.5%. The interest rate cuts last year coincided with a rise in the US unemployment rate, suggesting that the Fed might need to cushion the economic slowdown. However, due to the high degree of uncertainty surrounding Trump's policies, investors currently widely expect the Fed to maintain interest rates unchanged again at its next meeting on June 17-18.