Federal Reserve Governor Waller: Expects tariffs to only have a temporary impact on inflation

Federal Reserve Governor Christopher Wall made a speech in St. Louis on Monday, stating that even if the new round of tariffs leads to a sharp increase in prices, he still believes that this inflationary trend may only be "transitory," despite the widespread criticism the use of this term has received for Federal Reserve's misjudgment between 2021 and 2022. "I can already imagine people questioning: given what happened in 2021 and 2022, this viewpoint must be wrong," Wall said. "But one failure does not mean that this way of judgment should never be used again." He used the word "transitory" to describe the worst-case scenario of the impact of Trump's new round of tariffs on inflation. He emphasized that this is different from the "persistent" inflation after the COVID-19 pandemic. At that time, the Federal Reserve misjudged the sustainability of inflation and faced severe criticism from the public. Wall pointed out that despite the vivid memories of 2021 and 2022, he still believes that his analysis of the impact of tariffs is "correct" this time. This speech is also Wall's first detailed public discussion of the potential impact of Trump's tariff plan on the U.S. economy. Trump announced on April 2 that he would implement widespread tariff measures, provided a 90-day deferral period for some trading partners on the 9th, then exempted some tech products, and considered suspending some tariffs related to automobiles. "In such an uncertain environment, it is almost impossible to accurately predict the future of the economy." However, he still proposed two possible scenario predictions: extreme scenario, where the average U.S. tariff increases to 25% and continues until 2027; moderate scenario, where negotiations reduce tariffs to 10%. If tariffs remain at 25%, inflation may rise to around 5% on an annual basis in the short term, even if companies only pass on part of the costs to consumers, inflation may still rise to 4%. Wall said that this result would "clearly reverse the progress we have made in controlling inflation over the past few years." In this high-tariff scenario, he expects economic growth to significantly slow down, and the unemployment rate may rise from 4.2% in March to 5% next year. He added, "Although this figure may not seem extreme, once unemployment begins to rise, it often rises more noticeably." This may also prompt the Federal Reserve to cut interest rates early, but this "bad news-style rate cut" is not due to controlled inflation, but a passive choice in response to economic deterioration. In contrast, in the 10% tariff scenario, Wall believes that the peak of inflation may be close to 3%, and the Federal Reserve may adopt a "wait-and-see" attitude, with the possibility of further rate cuts later this year. This situation is a "good news-style rate cut," which is due to the economic environment allowing it, rather than crisis management. Even in this relatively mild scenario, Wall warned that it may exert some pressure on economic activity, but he said that the fundamentals of the United States are strong, with steady economic growth, relatively low unemployment rates, and inflation gradually falling, giving it the ability to withstand pressure. Wall concluded by stating that the new tariff policy will be "one of the biggest impacts on the U.S. economy in decades," and its future direction and economic consequences are still highly uncertain. The next Federal Reserve monetary policy meeting will be held on May 6-7, when the market will closely monitor how the Fed responds to these new economic variables.