(Headline USA) A top policymaker at the U.S. Federal Reserve said Wednesday that he still supported cutting interest rates this year—despite persistent inflation from the lame-duck Biden administration’s ongoing spending sprees and the prospect of that tariffs under the incoming Trump administration might also exacerbate it.
Christopher Waller, an influential member of the Fed’s board of governors, said he expected inflation to move closer to the Fed’s 2% target in the coming months. And in some of the first comments by a Fed official specifically about tariffs, he said that greater import duties likely would not push up inflation this year.
“My bottom-line message is that I believe more cuts will be appropriate,” Waller said in Paris at the Organization for Economic Cooperation and Development.
“If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view,” Waller added.
His remarks were noteworthy because the impact of tariffs is a wild card this year for the U.S. economy.
Financial markets have weighed down in recent months partly on fears that inflation may continue to be an issue, and that tariffs could make it worse.
According to some economists, producers may raise prices for customers to offset the increased costs of tariffs on imported materials and goods.
Yet, President-elect Donald Trump’s plan to promote American goods by incentivizing domestic industry with tax cuts, as well as his planned reductions in wasteful government spending might instead help drive up the dollar’s value once more, provided he can ensure an adequate supply of domestic goods to offset the increased cost of imports.
Waller suggested that he was more optimistic about inflation than many Wall Street investors.
“I believe that inflation will continue to make progress toward our 2% goal over the medium term and that further [rate] reductions will be appropriate,” Waller said.
While inflation has been persistent in recent months—it ticked up to 2.4% in November, according to the Fed’s preferred measure—Waller argued that outside of housing, which is difficult to measure, prices were cooling.
Waller’s remarks run counter to increasing expectations on Wall Street that the Fed may not cut its key rate much, if at all, this year with high prices lingering. The rate is currently about 4.3% after several reductions last year from a two-decade high of 5.3%. Financial markets are expecting just one rate cut in 2025, according to futures pricing tracked by CME Fedwatch.
Waller did not say how many cuts he specifically supports. Instead he said that Fed officials projected two reductions this year, as a group, in December.
But he also noted that policymakers supported a wide range of outcomes, from no cuts to as many as five. The number of reductions will depend on progress toward reducing inflation, he added.
Fed Chair Jerome Powell has said that the impact of tariffs on Fed policy and inflation is difficult to gauge in advance, until it’s clearer which imports are hit with tariffs and whether other nations retaliate with their own.
But at the Fed’s last press conference in December, Powell acknowledged that some of the central bank’s 19 policymakers were starting to incorporate the potential impact of Trump’s policies on the economy.
Lisa Cook, a member of the Fed’s governing board, said Monday that the central bank can “proceed more cautiously” with rate reductions.
Waller said one reason longer-term rates have risen is due to concern that the federal government’s budget deficit, already massive, could remain so or even increase.
Despite Trump’s regular vows to drain the Swamp, including his recruitment of Elon Musk and Vivek Ramaswamy to oversee the semi-public Department of Government Efficiency, his ambitious policy agenda also includes tax cuts and mass deportations that could add more to the $36 trillion national debt.
Trump’s first term added to it, although much of that occurred during the final year, when the COVID-19 pandemic and resulting government shutdowns required several rounds of economic stimulus to help citizens and small businesses to stay afloat.
Nonetheless, the inflation rate when Trump left office remained below the healthy 2% mark and only began to rise about a month into Biden’s presidency, nearly reaching double digits before the Fed began to address it in earnest, raising rates to stablize spending after the influx of new money sent prices spiraling out of control.
Still, the Fed cannot keep interest rates high indefinitely, or it risks an overcorrection with a critical mass of consumers defaulting on their existing loans due to the excessive borrowing fees.
“At some point the markets are going to demand a premium to accept the risk of financing” such increased borrowing, he said.
On Wednesday, the Fed was due to release minutes from its December meeting, which were expected to shed more light on what policymakers were thinking about inflation and the potential impact of tariffs.
Adapted from reporting by the Associated Press
