In analysing alternatives, Waller said, the Fed for now is left torn between a path in which the economy may “slow to a crawl” and unemployment rise to 5%, and one that looks little different than it did a few weeks ago.
If the full suite of tariffs planned by President Donald Trump remains in effect, the impact on inflation may still be temporary, Waller said, but the “effects on output and employment could be longer-lasting…If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the…policy rate sooner, and to a greater extent than I had previously thought.”
“With a rapidly slowing economy, even if inflation is running well above 2%, I expect the risk of recession
would outweigh the risk of escalating inflation, especially if the effects of tariffs in raising inflation are expected to be short lived,” he said.
In that case, he said, an economy that entered the year on a solid footing might slow, but not as dramatically or persistently as if tariffs are kept, as proposed, at an average as high as 25%.
Waller emphasised in remarks prepared for the Certified Financial Analysts Society of St. Louis that part of the dilemma for the Fed is knowing where the administration is heading.
“The new tariff policy is one of the biggest shocks to affect the U.S. economy in many decades,” Waller said. “Given that there is still so much uncertainty…I have struggled, like many others I have talked with, to fit these varying possibilities into a single coherent view of the outlook.”
The Fed in March held its policy rate steady in the 4.25% to 4.5% range with officials still projecting three quarter-point rate cuts this year.
But officials have also said the tariff policy, which Waller referred to as the “elephant in the room” of Fed discussions, had made even the short-term outlook unpredictable.
