Tariffs of the magnitude that President Trump has enacted are poised to raise inflation in the United States. Whether it will be a temporary surge or one that spirals into a more serious problem is not yet clear, echoing a similar debate that bedeviled officials at the Federal Reserve during the coronavirus pandemic.
Back then, the Fed initially billed the rise in inflation stemming from business shutdowns and supply chain snarls as “transitory,” an approach that led the central bank to be late in raising interest rates when it became clear that price pressures were persistent.
One influential official at the Fed is reviving that view. In a speech on Monday, Christopher J. Waller laid out two scenarios that may play out for Mr. Trump’s tariffs, which the Fed governor described as “one of the biggest shocks to affect the U.S. economy in many decades.” How these levies impact both inflation and growth will impact how soon the Fed can again lower interest rates.
If a recession appears to be taking shape, Mr. Waller said he would support the Fed cutting interest rates “sooner and to a greater extent” than initially expected.
The first scenario Mr. Waller laid out assumes that the average tariff imposed on U.S. imports remains around its current level of 25 percent for an extended period. The second assumes a more modest 10 percent universal tariff, as other levies are removed over time.
In both cases, Mr. Waller argued, the effects on inflation would not persist so long as expectations about future price pressures remained under control.
“I can hear the howls already that this must be a mistake given what happened in 2021 and 2022,” he said in a speech at an event in St. Louis. “But just because it didn’t work out once does not mean you should never think that way again.”
Mr. Waller argued that if Mr. Trump maintains a more aggressive package of tariffs, economic growth is “likely to slow to a crawl and significantly raise the unemployment rate.” Inflation could rise to around 4 percent this year before fading back toward the Fed’s 2 percent target. He also warned that the unemployment rate could approach 5 percent, substantially higher than the current 4.2 percent level.
“While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting,” he said.
“I expect the risk of recession would outweigh the risk of escalating inflation, especially if the effects of tariffs in raising inflation are expected to be short lived,” Mr. Waller added.
After lowering interest rates by a percentage point last year, the Fed has paused as it awaits more clarity about Mr. Trump’s plans for the economy. Already, officials appear increasingly worried about the potential fallout, striking a much more hawkish tone in recent days than Mr. Waller’s about the risks to inflation.
Expectations about future inflation have started to shift but remain more or less stable over a five-year period, a gauge that holds more weight for officials than the shorter-term measures.
On Monday, new data from the New York Fed showed that consumers were bracing for higher inflation in the year ahead as well as higher unemployment. In five years’ time, they expect inflation to stay stuck around 3 percent.
In the event that Mr. Trump scales back his tariffs, Mr. Waller said, the impact on the economy would be more muted and, in turn, would give the Fed more flexibility to be patient about rate cuts. That could mean the central bank waits until the latter half of this year to lower rates again, he said.
