Waller: Tariff Inflation Would Be Transitory
Federal Reserve Governor Christopher Waller just used a word that Federal Reserve officials have been loathe to invoke for a couple of years now.
The word? Transitory.
In a major speech Saturday at the Bank of Korea International Conference, Waller tackled the economic implications of new U.S. trade policies head-on. He acknowledged that tariffs will likely push up consumer prices in the short term, but stressed that this inflation bump is likely to be temporary, limited, and ultimately irrelevant to the Fed’s broader strategy.
“The economics behind a tariff increase implies it should have a transitory effect on prices—tariffs raise prices once, but those prices don’t keep going up,” Waller said.
Waller acknowledged the alarm bells transitory is likely to set off:
I know that hearing “transitory” will certainly remind many people of the consensus on the FOMC in 2021 that the pandemic increases to inflation would be transitory. Inflation turned out to be much more persistent than we thought it would be. Am I playing with fire by taking this position again? It sure looks like it. So why do I believe a tariff-induced inflation spike will not be persistent this time?
Waller argued that the inflation triggered by tariffs is fundamentally different from what happened during the pandemic. In 2021, inflation turned out to be far more persistent because it was fueled by massive fiscal stimulus, pent-up consumer demand, and supply chains stretched to the breaking point. Prices didn’t just jump once—they kept climbing as shortages, labor mismatches, and elevated spending pushed inflation higher month after month.
By contrast, Waller said tariffs operate like a one-time tax on imported goods. If businesses pass those costs on to consumers, prices may rise—but they don’t keep rising. “A 10 percent tariff, for instance, raises the price level of affected goods, but that doesn’t mean those goods keep getting 10 percent more expensive every year,” he explained. As long as inflation expectations remain anchored and the labor market remains strong, the impact fades quickly. In Waller’s view, that’s the definition of transitory.
A Green Light for Strategic Trade Policy
Waller’s speech outlined two hypothetical scenarios:
- In a mild case, with an average 10 percent tariff across imported goods, inflation could temporarily rise to around three percent before easing.
- In a more extreme case, with a 25 percent average tariff, inflation might peak between four and five percent before returning to trend.
But critically, in neither scenario does Waller project inflation to stay elevated—nor does he see the Fed needing to reverse course on interest rate cuts because of tariffs.
That should send a clear message to both traders and policymakers: you can run a pro-worker trade policy and still have a credible anti-inflation stance. Tariffs don’t have to mean higher long-term inflation or tighter monetary policy. And they certainly don’t justify keeping rates at recessionary levels.
Markets Have It Wrong
Waller’s comments stand in sharp contrast to how many on Wall Street are framing the issue. Since President Trump announced a sweeping new tariff policy—starting with a 10 percent baseline and potentially moving to 60 percent on Chinese imports—pundits and analysts have been warning that inflation will rebound, derailing the Fed’s plans to cut rates.
Waller has been consistently making the argument that this is wrong.
He emphasized that monetary policy should look through short-term noise, including one-off policy shocks like tariffs. He also noted that inflation expectations remain well-anchored in markets—and that even household inflation expectations, though elevated, have not changed consumer behavior in a meaningful way.
This is consistent with what we’ve seen since 2018. Tariffs imposed under the first Trump administration caused only modest price increases, with most of the impact absorbed by foreign exporters, supply chains, or profit margins. Waller seems to be working from the same playbook: tariffs may cause a visible bump, but the economy can absorb it.
“Good News” Cuts Still on the Table
The other big takeaway: Waller is still open to rate cuts later this year. And not just because the economy might slow, but because inflation is steadily improving, and further cuts could be justified by macroeconomic strength.
These would be “good news” rate cuts, as Waller puts it: cuts driven by cooling inflation, not deteriorating growth. It’s a subtle but important shift from the recession-fighting logic of the past two years. If the Fed is confident inflation is on a sustainable glide path back toward two percent—even with a few bumps along the way—then real rates are simply too high, and monetary policy should ease.
That means the current fed funds rate, sitting at around 4.3 percent, may no longer be appropriate for an economy where inflation is falling and the labor market remains strong.
Federal Reserve Governor Christopher Waller at an event at the Federal Reserve Bank of Kansas City on July 17, 2024. (Federal Reserve via Flickr)
No Labor Market Red Flags
Waller also pushed back against the idea that tariffs will hammer jobs. He expects any drag on the labor market to be modest and short-lived. In other words: no return to 1970s stagflation, no collapse in hiring, and no need for the Fed to overreact.
This again puts him at odds with the media narrative. For weeks, outlets like Bloomberg and the New York Times have sounded the alarm that tariffs will hurt American workers. Waller says the opposite is likely to be true—that tariffs can coexist with low unemployment and steady wage growth.
Waller: The Next Fed Chairman?
Waller’s speech may be remembered as a quiet turning point. For decades, the consensus was that monetary policy had to serve the demands of globalization. Low tariffs, open borders, cheap imports—anything else risked inflation and economic instability.
But Waller is writing a new chapter. If his view prevails at the Fed, it means Washington no longer has to choose between stable prices and national economic strategy. Tariffs can be a tool, not a threat.
That’s good news for manufacturers, good news for workers—and maybe, just maybe, a sign that the era of market groupthink is coming to an end.
It also may mark him as one of the most promising candidates to replace Fed chairman Jerome Powell next year.
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