The recent tariff policy adopted by the President Donald Trump two weeks ago is “one of the biggest shocks to affect the U.S. economy in decades,” a governor of the Federal Reserve said Monday, adding that the latest increases make for a “highly uncertain” future for that policy.
Speaking to the Certified Financial Analysts (CFA) Society of St. Louis, in St. Louis, Mo., Federal Reserve Board Gov. Christopher J. Waller said the uncertain aspect for the policy makes for a highly uncertain outlook for the economy. He said that “demands that policymakers remain flexible in considering the wide range of outcomes.”
The Fed governor, however, noted optimism based on the past performance of the country. “In the end, the United States is a dynamic, resilient capitalist system that responds well to shocks and always has. I suspect that will continue to be the case now.
Waller told the group that Trump’s tariff increases announced April 2 were “dramatically larger” than he had anticipated. He said combining those increases to tariffs set in March, along with retaliatory actions taken by other countries, would have broad effects.
“It is clear that tariffs this large and broadly applied could significantly affect the economy and the Federal Open Market Committee’s (FOMC) pursuit of our economic objectives,” Waller said. “Given that there is still so much uncertainty about how trade policy will play out and how businesses and households will respond, I have struggled, like many others I have talked with, to fit these varying possibilities into a single coherent view of the outlook.”
Waller suggested that unemployment could jump to 5% by next year under the large tariffs scenario He said he expects inflation to rise, particularly if the higher tariffs Trump announced initially (and then suspended for 90 days – except for China) remain in place. He noted private sector forecasts call for increased inflation by 1.5 to two percentage points over the next year, which he described as a “reasonable estimate” bringing inflation to 4% or 5%.
However, Waller said he expects inflation to be temporary, easing to a “more moderate level” in 2026. “Inflation could rise starting in a few months and then move back down toward our target possibly as early as by the end of this year.
Under the lower tariffs scenario – that is, that the tariffs, except for China, remain suspended — the effect on inflation would be “significantly smaller” than if larger tariffs remained, peaking at about 3% on an annualized basis.
He said in that scenario with more limited effects on inflation and economic activity, he would support a limited monetary policy response.
Gov. Christopher J. Waller: A Tale of Two Outlooks
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