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Tariff-induced inflation not persistent; rate cuts expected later this year: Fed governor

Published: 02 Jun. 2025, 15:42

YOON SO-YEON
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A view shows rods of CO2-reduced steel at a production plant in Georgsmarienhuette, Germany, on Sept. 19, 2024. [REUTERS/YONHAP]

U.S. Federal Reserve Gov. Christopher Waller said Monday that he sees room for interest rate cuts later this year amid expectations that sweeping U.S. tariffs are likely to temporarily push up inflation and raise unemployment.

Waller, a member of the Board of Governors of the U.S. Federal Reserve System, made the remarks in his keynote speech at the 2025 Bank of Korea (BOK) International Conference in Seoul on structural shifts and monetary policy.

"Given my belief that any tariff-induced inflation will not be persistent and that inflation expectations are anchored, I support looking through any tariff effects on near-term inflation when setting the policy rate," Waller said.

"Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2 percent goal, and that the labor market remains solid, I would be supporting 'good news' rate cuts later this year," he added.

His "smaller tariff" scenario assumed a 10 percent average tariff on good imports, while sector-specific duties would be negotiated lower over time. The "large tariff" scenario assumed an average trade-weighted tariff on goods imports of 25 percent, and that would remain in place for some time.

A drone view shows shipping containers from China at the Port of Los Angeles, in San Pedro, California, on May 1. [REUTERS/YONHAP]

"In both cases, I assumed that the tariff increases would lead to a one-time boost to prices that would temporarily raise inflation," Waller said.

Following the two-day Federal Open Market Committee meeting last month, the Fed held its benchmark interest rate steady for the third consecutive time, pointing to heightened economic uncertainty and increased risks of higher inflation amid Trump's aggressive tariff policy.

Waller pointed to "downside risks to economic activity and employment and upside risks to inflation" in the second half of this year.

U.S. President Donald Trump delivers remarks on tariffs in the Rose Garden at the White House in Washington, D.C. on April 2. [REUTERS/YONHAP]

"I do expect tariffs will result in an increase in the unemployment rate that will, all else equal, probably linger. Higher tariffs will reduce spending, and businesses will respond, in part, by reducing production and payrolls," he said.

"But how these risks evolve is strongly tied to how trade policy evolves."

During a policy dialogue with BOK Gov. Rhee Chang-yong, Waller pointed out that today's inflation situation differs from that of the COVID-19 pandemic.

The pandemic had a longer-than-expected impact on labor supply and led to global supply chain disruptions, he said, adding that the U.S. government's aggressive fiscal policy responses "excessively" stimulated the recovery and led to stickier inflation.

Meanwhile, Rhee said that Korean companies would be able to respond effectively if the U.S. reciprocal tariffs settle at around 10 percent.

But he stressed that not only bilateral tariff negotiations with the United States but also the outcome of the U.S.-China trade talks are crucial for Korea and other Asian countries.

In April, Trump announced reciprocal tariffs, including a 25 percent levy on Korean goods, though their implementation was later postponed for 90 days.

Trade negotiations are currently underway between Seoul and Washington, with the two sides aiming to reach a "package" agreement on trade and related issues by July 8.

Korea is already reeling from the effects of the aggressive U.S. tariff scheme.

Exports, a key economic growth engine, fell 1.3 percent in May from a year earlier, as shipments to the United States dropped 8.1 percent following the introduction of Washington's tariff policy.

In an effort to shore up the sagging economy, the BOK slashed the key interest rate by a quarter percentage point last week.

Yonhap