Fed Governor Waller’s Push for Rate Cuts and Temporary Tax Impact Signals
Federal Reserve Governor Christopher Waller is gearing up to make a case at the upcoming Federal Open Market Committee (FOMC) meeting in July. He seems inclined to support interest rate cuts, challenging the Fed’s slow adaptation to the shifting economic landscape. He feels that current policies are lagging behind what’s happening in the economy.
Waller recently noted on Bloomberg that the labor market doesn’t feel as tight as it did last year, suggesting that the private sector is somewhat precarious for the moment. This viewpoint follows a series of remarks he made starting in early June. He has been highlighting the need for policies that can adapt to easing inflation, which, he argues, will moderate expectations and working conditions.
In a speech on June 1, Waller discussed the risks associated with monetary policy, mentioning “three me” factors: inflation, inflation expectations, and labor market slack. He conveyed that new tariffs could possibly lead to temporary price increases, but these wouldn’t likely result in a sustained inflation surge. Waller estimated that a 10% tariff might only increase core PCE inflation by around 0.3 percentage points over a year, with the effect tapering off afterward. Historically, he indicated, only about a third of tariff costs end up being passed on to consumers, with the remainder absorbed by exporters or local importers.
The Timing for Rate Reductions
Waller’s recent insights set the stage for his more assertive comments in mid-July. During a speech and subsequent interview with Bloomberg Television on July 17, he reiterated that while tariffs can have an inflationary effect, it could be modest and temporary, not enough to stabilize retention. He highlighted high-frequency online price data as showing limited evidence of substantial price pressures, noting that domestic product prices have remained mostly steady. Inflation expectations appear to be falling, too.
Recent data supports this view. A preliminary survey from the University of Michigan in July reflected a drop in inflation expectations. The expectations among consumers dipped to 4.4% in July, down from 5.0% in June—the lowest level since February. Five-year expectations also dropped to 3.6%, the lowest since February. This suggests consumers aren’t anticipating a significant rebound in inflation and seem confident that price stability is returning.
This assessment is echoed by inflation statistics. In June, the Consumer Price Index (CPI) rose by 0.3%, with the core CPI, excluding food and energy, increasing only by 0.2%. While some categories related to trade and imports saw price hikes, others experienced declines. Notably, prices in the import-heavy automotive sector dropped significantly.
Additionally, producer prices are holding steady. The headline producer price index (PPI) remained unchanged in June, as did the core PPI, which omits food, energy, and trade services. The final demand service price decreased, and measures of intermediate demand—which often reflect sensitivity to import costs—rose by only 0.1%. There’s scant indication of cost pressures in earlier production stages.
Data on imports and exports reinforces this perspective. The Import Price Index posted a minimal increase of just 0.1% in June, amid a 0.2% decline over the past year. Prices for imports from China increased for the first time since 2022, with a 0.5% rise in June, yet remained 2.2% lower than a year prior. This likely indicates that foreign producers are absorbing a significant portion of tariffs by discounting their products.
Waller’s conclusions rely not only on recent data but also on a consistent analytical framework from his June and July speeches. Unlike the inflation surge seen in 2021-22, he asserts that the current environment is not marked by supply chain breakdowns or over-stimulated financial markets, and the labor market feels less pressurized. He believes the economy is slowing, and inflation is gradually subsiding, noting that real interest rates remain quite constrained.
The Call for Intellectual Diversity in the Fed
Waller’s openness to different viewpoints reflects an increasing awareness of the risks associated with an overemphasis on certain economic indicators, suggesting they may overshadow the potential dangers of acting prematurely. He argues that maintaining high interest rates could pose challenges.
If Waller were to diverge from his colleagues, it would be a significant moment, signaling a rift within the Federal Open Market Committee. It shows that at least one decision-maker believes it’s time to consider easing measures. This challenges the notion that the Fed operates strictly from a predetermined script regarding tariffs, inflation, and interest rates. Rather than approaching tariffs as blanket reasons for delaying rate cuts, Waller assesses them as one of many variables affected by real measured impacts.
Ultimately, Waller’s stance is a return to foundational economic principles. The inflation fears observed in recent years seem to be giving way to a disinflationary trend, with price pressures dissipating. Consumers appear more focused on relief than on risks. The Fed’s credibility hinges on responding to actual circumstances rather than hypothetical concerns. Waller’s position has become quite clear, regardless of whether other Fed leaders agree: rate policy must be driven by the data.
