WASHINGTON — A leading official from the U.S. Federal Reserve expressed his continued support for interest rate reductions this year, even in the face of ongoing inflationary pressures and the anticipated implementation of widespread tariffs under the soon-to-be-inaugurated Trump administration.
Christopher Waller, a prominent member of the Fed’s board, conveyed his belief that inflation rates would decline towards the Fed’s target of 2% in the upcoming months. In addressing the potential influence of tariffs, he stated that higher import duties probably would not lead to increased inflation this year.
“My key message is that I believe additional cuts would be fitting,” Waller remarked in Paris during a session at the Organization for Economic Cooperation and Development.
Furthermore, Waller elucidated that if tariffs do not have a significant or lasting impact on inflation, they would likely not alter his perspective. His insights are particularly important as the effect of tariffs represents an unpredictable element for the U.S. economy this year. Recent market conditions have deteriorated, partly due to concerns that inflation could persist and that tariffs might exacerbate the situation. Typically, producers tend to elevate their prices to alleviate the heightened costs associated with tariffs on imported goods.
Despite these concerns, Waller expressed a more optimistic view on inflation compared to many investors on Wall Street. “I am confident that inflation will gradually approach our 2% target over the medium term, warranting further reductions in rates,” he stated. Although inflation rose to 2.4% in November—according to the Fed’s favored metric—Waller noted that aside from the housing sector, where inflation is challenging to assess, prices are beginning to stabilize.
His statements contradict growing expectations among Wall Street analysts that the Fed may opt against significant interest rate cuts this year amid persistent high prices. Currently, rates hover around 4.3% following several reductions in the previous year, down from a peak of 5.3%. Market forecasts are indicating only one potential rate reduction by 2025, based on futures prices tracked by CME Fedwatch.
While Waller did not specify an exact number of cuts he supports, he mentioned that Fed projections for two cuts this year were made collectively by the council back in December. Furthermore, he acknowledged that officials are generally open to varied outcomes, ranging from no reductions to as many as five, which would depend on the progress made in taming inflation.
Fed Chair Jerome Powell had previously stated that the implications of tariffs on both Fed policy and inflation remain difficult to predict until it’s clearer which imports will face tariffs and if other nations will respond with counter-tariffs. In the latest Fed press conference, Powell acknowledged that some policymakers have begun to tentatively factor in estimates of the economic impact of President-elect Donald Trump’s anticipated policies into their forecasts.
Other officials within the Fed have hinted at a more cautious approach concerning further rate cuts this year, following three consecutive reductions throughout 2024. Lisa Cook, another member of the Fed’s board, shared on Monday that the central bank would be able to “proceed with more caution” regarding rate reductions.
In a Q&A session, Waller indicated that one contributing factor to the uptick in long-term rates is the concern surrounding the federal government’s substantial budget deficit, which may persist or even escalate. Higher long-term interest rates have caused an uptick in borrowing costs, notably affecting loans for mortgages and various forms of credit, thereby intensifying pressure on both consumers and businesses. “At some point, the markets will demand a premium to accommodate the risks associated with increased borrowing,” he remarked.
Later on Wednesday, the Federal Reserve is expected to release the minutes from its December meeting, which may provide further insight into the policymakers’ thoughts regarding inflation as well as the potential impacts of tariffs.
