Will the central bank cut rates this year?
Federal Reserve governor Christopher Waller said on Monday that interest rate cuts remain a possibility this year, even as renewed US tariffs are expected to raise inflation.
Speaking at a conference in Seoul, Waller said the recent tariffs imposed by President Donald Trump’s administration would likely drive inflation higher in the near term. However, he indicated that these effects would not be long-lasting and should not weigh heavily in the Fed’s rate-setting decisions.
“I support looking through any tariff effects on near term-inflation when setting the policy rate,” Waller told attendees.
Rate cuts still on the table
If inflation continues its downward path toward the Fed’s 2% target and the labor market remains resilient, Waller said he would support “good news” rate cuts later in the year. “Fortunately, the strong labor market and progress on inflation through April gives me additional time to see how trade negotiations play out,” he added.
A report from Reuters noted that Waller’s outlook aligns with his prior remarks, but contrasts with more cautious signals from other central bank officials who have stressed the need to wait for clearer signs from the economy.
Tariffs introduced under Trump have varied widely in rate and timing, contributing to uncertainty in financial markets and policymaking. Economists broadly agree that the new duties are likely to weaken economic growth, raise unemployment, and push up inflation.
The current federal funds target stands between 4.25% and 4.5%, with investors divided on whether the central bank will begin lowering rates this year.
Waller acknowledged that tariff impacts are likely to become more visible in the second half of 2025. “Higher tariffs will reduce spending, and businesses will respond, in part, by reducing production and payrolls,” he said. Still, he emphasized that inflation from the tariffs would likely be a one-time adjustment.
He added that the probability of a “large” tariff scenario has diminished, and that in the case of more modest increases, much of the cost may not reach consumers directly.
Inflation expectations remain anchored
Waller also addressed lingering concerns over inflation expectations, pointing to stable forecasts from markets and professional analysts. Real-world data is not showing much deterioration in the expected path of inflation, Waller noted.
Rising bond yields, according to Waller, reflect a broader pullback from US assets amid concerns over increased government borrowing and cooling sentiment among foreign investors. “There’s been a risk-off attitude from foreign buyers of Treasuries, all US assets,” he said. “It’s not really that big, but it’s definitely there.”
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