Tariffs’ Impact on the U.S. Economy

The Trump administration’s tariff policies are sending shockwaves through the U.S. economy. Federal Reserve Governor Christopher Waller warned that these tariffs could compel the Fed to lower interest rates to avert a recession, even if inflation remains elevated. This situation presents a paradox where policymakers must navigate a potential economic slowdown.

The Dilemma Facing the Fed

Waller expressed concerns about the economy possibly “slowing to a crawl” with unemployment potentially rising to 5%. He acknowledged that if the full range of tariffs remains enforced, the inflationary effects might be fleeting. However, the repercussions on output and employment could linger much longer.

Considering the Alternatives

If negotiations manage to reduce tariffs to around 10%, Waller believes the landscape for monetary policy might not look drastically different than in early March 2023. He stated that inflation could benefit from a lower tariff impact, bringing it more in line with the Fed's 2% target. In such a scenario, rate cuts aimed at boosting the economy could be on the horizon later this year.

The Fed’s Policy Stance

Currently, the Federal Reserve has maintained its policy rate between 4.25% and 4.5%, with plans for several quarter-point cuts this year. Yet, the unpredictable tariff policy—dubbed the