Fed Governor Waller Advocates Rate Cut—and Signals Tariff Effects Are Transitory
Federal Reserve Governor Christopher Waller is preparing to dissent at the July Federal Open Market Committee (FOMC) meeting. He has signaled he may vote for a rate cut, a direct challenge to the Fed’s sluggish response to evolving economic conditions. He believes policy is already behind the curve.
“The labor market is definitely not as tight as it was last year… The private sector is kind of on the edge right now,” Waller said Friday on Bloomberg TV, pointing to the fact that June’s job gains were heavily padded by large gains in the public sector.
This follows a series of remarks stretching back to early June, in which Waller has laid out a systematic case for easing policy in the face of moderating inflation, anchored expectations, and softening labor conditions.
In his June 1 speech, Waller framed the risks to monetary policy in terms of what he called the “Three I’s”: inflation, inflation expectations, and the interaction of policy with labor market slack. There, he made the case that while new tariffs might create a temporary price level increase, they were unlikely to generate a sustained acceleration in inflation. Waller estimated that a 10 percent across-the-board tariff would raise core PCE inflation by just 0.3 percentage points for a single year. After that, the effect would likely fade. Historical evidence, he argued, suggests that only about one-third of tariff costs are passed on to consumers, with the remainder absorbed by foreign exporters or domestic importers.
This is pretty straightforward stuff. A hike in tariffs does not directly raise consumer prices. Some portion of the tariff may be passed through to consumers; but once it is, there’s no further inflationary pressure. Unlike an expansion of the money supply or fiscal stimulus, tariffs do not have multiplier effects expanding demand faster than supply can keep up. The only real puzzle here is why so many economists and economic pundits insist there are real inflation risks from tariffs.
The Time for a Rate Cut Is Now
These observations formed the backdrop for Waller’s more assertive remarks in mid-July. In a July 17 speech and follow-up interview with Bloomberg TV, Waller reiterated that the inflationary effects of tariffs were too modest and too short-lived to justify holding rates steady. High-frequency online price data, he noted, show import prices ticking up only slightly, with little evidence that broader price pressures are building. Prices for domestic goods have remained largely unchanged. Inflation expectations, if anything, are declining.
Indeed, the most recent data bear this out. The University of Michigan’s preliminary July consumer sentiment survey showed a notable drop in inflation expectations. One-year-ahead expectations fell to 4.4 percent from 5.0 percent in June, the lowest level since February. Five-year expectations also declined to 3.6 percent, also the lowest since February. That means that inflation expectations have now returned to their pre-Liberation Day levels. These figures suggest that consumers are not anticipating a resurgence of inflation and are instead growing more confident that price stability is returning.
This view is echoed in the inflation data. The Consumer Price Index (CPI) for June rose 0.3 percent, while core CPI—excluding food and energy—rose just 0.2 percent. While some categories tied to trade and imports saw price increases, others saw declines. The import-heavy auto sector saw a steep decline in prices.
Producer prices, too, remained contained. The headline Producer Price Index (PPI) was unchanged in June, and core PPI—which strips out food, energy, and trade services—was also flat. Final demand services prices edged lower. The measure of intermediate demand goods, often more sensitive to imported input costs, ticked up by just 0.1 percent. There is little to suggest that cost pressures are building at earlier stages of production.
Import and export data reinforce this picture. The Import Price Index rose just 0.1 percent in June and is down 0.2 percent over the past year. Prices for imports from China increased for the first time since 2022, rising 0.5 percent in June, but they remain 2.2 percent lower than a year ago. This suggests that foreign producers are absorbing much of the tariffs by discounting their goods.
Waller’s analysis is grounded not only in recent data but also in a consistent framework he articulated in both his June and July speeches. He emphasized that in contrast to the inflation surge of 2021–22, the present moment is not marked by supply chain breakdowns, fiscal overstimulation, or a red-hot labor market. The economy is showing some signs of slowing, in his view, and inflation is receding. Real interest rates are now firmly restrictive.
The Need for Intellectual Diversity at the Fed
His willingness to consider a dissent reflects a growing recognition that the risks of overtightening now outweigh the risks of acting too soon. In that context, Waller argues, the case for keeping rates elevated becomes harder to defend.
If he does break with his colleagues, Waller’s dissent would mark a significant moment—a rare public split on the Federal Open Market Committee and a clear signal that at least one policymaker believes the time for easing has arrived. It would also challenge the perception that the Fed is operating under a fixed script when it comes to tariffs, inflation, and rate decisions. Rather than treating tariffs as a blanket reason to delay cuts, Waller is treating them as one variable among many, to be weighed based on their actual, measured effects.
Ultimately, Waller’s argument is a return to fundamentals. The inflation scare of recent years has given way to disinflation. Price pressures are concentrated and fading. Consumers see relief, not risk. The Fed’s credibility rests on responding to real conditions, not hypothetical threats. Whether or not Powell and the majority agree, Waller’s position is now unmistakable: rate policy should follow the data.
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