Fed's Waller still open to cutting interest rates later this year

Federal Reserve Governor Christopher Waller indicated that interest rate cuts remain possible later this year, even with potential inflationary pressures from the Trump administration's tariffs. Waller stated he would "look through" near-term tariff effects on inflation when setting policy rates, supporting cuts if underlying inflation continues toward the 2% target and the labor market remains solid. He acknowledged downside risks to economic activity and upside risks to inflation in the second half of 2025 tied to trade policy, but believes the risks of a large tariff scenario have decreased.

Analysis

Federal Reserve Governor Christopher Waller signaled a continued possibility of interest rate cuts later this year, contingent upon ongoing progress in underlying inflation towards the Fed's 2% target and a persistently solid labor market. He indicated a willingness to 'look through' temporary inflationary pressures arising from potential import tariffs, particularly if these tariffs are at the lower end of expectations and their impact is perceived as a one-time event, predominantly in the second half of 2025. Waller's comments, described as having a 'dovish' tone, suggest a potential divergence from more cautious stances within the central bank, especially considering the current federal funds target rate range of 4.25% to 4.5%. He acknowledged that while the economy has shown little impact from tariffs thus far, there are downside risks to economic activity and employment, and upside risks to inflation in H2 2025, largely dependent on the evolution of trade policy. However, Waller also noted that the risks of a 'large' tariff scenario have diminished and that he places greater weight on market-based inflation expectations and professional forecasts, which currently suggest contained price pressures, rather than survey data showing divergent readings.

Key Decisions for Investors

• Investors should closely monitor incoming inflation data, particularly core measures, and labor market statistics, as sustained positive trends in these areas are prerequisites for the Federal Reserve to consider the 'good news' rate cuts articulated by Governor Waller.
• Given the potential for the Fed to disregard temporary tariff-induced inflation spikes, consider that assets sensitive to lower interest rates could benefit if underlying disinflation continues and trade policy impacts remain limited.
• Factor in heightened uncertainty regarding trade policy developments, particularly for the second half of 2025, as these could introduce simultaneous upside risks to inflation and downside risks to economic growth and employment, thereby influencing monetary policy trajectory.