FED Member Waller Shared Two Scenarios for the US Economy: One Includes a Faster Interest Rate Cut, the Other Has a Possibility of Keeping Rates Steady!

The Wall Street Journal's experienced economics reporter, known as the "FED spokesperson," Nick Timiraos, shared the recent statements of FED Board Member Chris Waller with the public. Waller's remarks indicate a more dovish stance than the general rhetoric within the FED.

According to Timiraos, Waller focused on two different scenarios in the context of the current economic conditions and the possible effects of trade tariffs: a high tariff scenario and a low tariff scenario.

High Customs Duty Scenario: Inflation is Temporary, Recession Risk is More Significant

According to Waller, if the average customs tariffs of 25% remain in effect, this could cause core PCE inflation to rise to levels between 4% and 5% within the year 2025. However, Waller argues that this effect will be temporary and that the FED may "look past" such temporary inflationary pressures. He cites the continuation of a tight monetary policy stance, stable inflation expectations, and the noticeable slowdown in the economy creating pressure on prices as justification for this.

Waller stated that, in this scenario, the FED could make an earlier and faster interest rate cut than expected, saying, "As the economy slows rapidly, even if inflation remains above 2%, the risk of recession outweighs the risk of a short-term increase in inflation."

Waller, referring to the policy mistakes in the 2021–2022 period, stated, "It would not be right to completely disregard similar analyses just because things did not go as expected during that time."

Low Customs Duty Scenario: Less Inflationary Pressure, More Limited Intervention

In the case of a more moderate trade policy, meaning that only the 10% base tariffs are maintained and others are removed, Waller indicates that the increase in inflation will be much more limited, predicting that the peak inflation rate will remain around 3% on an annual basis. He states that inflationary effects may emerge more slowly in this scenario but could also last longer.

In this context, Waller, who stated that the pressure for the FED to cut interest rates may decrease and that the response of monetary policy may remain limited, noted that if more evidence emerges in the second half of the year that inflation is moving towards the 2% target, the possibility of interest rate cuts could come back onto the agenda.

According to Timiraos' analysis, Waller's statements demonstrate a more flexible approach compared to the prevailing "low inflation steadfastness" line within the FED. While a majority of other members adopt a more hawkish stance to keep inflation expectations in check, Waller considers the risk of economic slowdown as a more pressing threat.