By Gloria Ogbonna

In a speech that may shape the future of U.S. monetary and trade policy, Federal Reserve Governor Christopher Waller reignited debate over inflation by reintroducing a word the Fed has long avoided: transitory.

Speaking Saturday at the Bank of Korea’s International Conference, Waller addressed the potential inflationary effects of renewed U.S. tariff policies. While acknowledging that import duties could cause a short-term uptick in prices, he argued that such inflation would be brief, self-limiting, and ultimately non-threatening to the Federal Reserve’s long-term policy goals.

“The economics behind a tariff increase implies it should have a transitory effect on prices—tariffs raise prices once, but those prices don’t keep going up,” Waller stated, addressing concerns that the word “transitory” might reignite memories of the Fed’s misjudgment in 2021.

Back then, Federal Reserve officials, including Waller, largely underestimated the staying power of pandemic-era inflation. What was dismissed as temporary turned into a prolonged battle with soaring prices, causing a trust deficit between the Fed and the public. But this time, Waller insists, things are different.

Tariff-Induced Inflation vs. Pandemic Inflation: A Different Beast

Waller drew a sharp distinction between the inflation we saw in 2021 and the kind triggered by tariffs. Pandemic inflation, he explained, was driven by an extraordinary mix of factors: historic fiscal stimulus, explosive consumer demand, labor shortages, and supply chain breakdowns. These factors fed a cycle of persistent price increases across the economy.

By contrast, tariff-related inflation acts more like a one-off event. “A 10 percent tariff raises the price of affected goods once.

But that doesn’t mean those goods continue to get 10 percent more expensive every year,” Waller noted. Tariffs function like a flat import tax—once the new price level is absorbed, there’s little reason for further price escalation, especially if inflation expectations remain stable and the labor market resilient.

Two Scenarios: Mild and Moderate Inflation Spikes

Waller laid out two hypothetical scenarios:

• Mild Case: A 10 percent average tariff across imports could temporarily push inflation to about 3%, after which it would ease back toward the Fed’s 2% target.
• Severe Case: A 25 percent average tariff might elevate inflation to 4–5%, but again, the effect would be short-lived.

In neither scenario, Waller argued, should the Federal Reserve feel compelled to abandon its planned rate cuts or resort to tighter monetary policy. In fact, if inflation remains on its current downward trajectory, the Fed could begin easing interest rates without triggering renewed price pressures.

This, Waller said, would represent “good news cuts”—rate reductions driven not by economic weakness, but by improved macroeconomic fundamentals.

Challenging Market Assumptions and Wall Street Narratives

Waller’s remarks challenge prevailing sentiment on Wall Street and in much of the financial press. Since former President Donald Trump proposed an aggressive new tariff policy—beginning with a 10% baseline and potentially escalating to 60% on Chinese imports—many investors and analysts have warned that inflation could spike again, forcing the Fed to reverse course on interest rate cuts.

Waller disagrees. He argued that markets are overreacting and failing to differentiate between structural inflation and policy-induced, one-time price adjustments. “Monetary policy should look through short-term noise,” he emphasized, “especially one-off policy shocks like tariffs.”

Backing up his claim, Waller pointed to past evidence: tariffs imposed during Trump’s first term in 2018 caused only modest inflationary impacts, many of which were absorbed by foreign exporters, slimmer profit margins, or rerouted supply chains. The U.S. economy adapted then, and Waller believes it can again.

Labor Market Stability: No Return to the 1970s

Another fear Waller worked to dispel was that tariffs would trigger job losses or slow hiring. He acknowledged that tariffs may introduce some temporary friction into the labor market, but emphasized that any impact is likely to be marginal.

“No return to 1970s-style stagflation,” he assured, pushing back against claims that the U.S. is headed toward a period of high inflation combined with low economic growth and high unemployment.

Instead, Waller argued that it is possible—and even desirable—for the U.S. to pursue a strategic, pro-worker trade policy without compromising its inflation-fighting credibility.

If correct, this would represent a paradigm shift in how economists view tariffs: not as inherently inflationary, but as manageable within a modern, data-driven central banking framework.

A Shift in Monetary Doctrine—and a Hint at Waller’s Future

Christopher Waller’s speech may signal more than a defense of tariff policy. It could mark the beginning of a broader rethinking of how trade, inflation, and interest rates interact in a post-globalization world.

For decades, central banks treated open markets and minimal trade barriers as sacrosanct, warning that protectionism would inevitably lead to inflation and economic instability.

But Waller appears to be offering a new model: one where tariffs can be used tactically without undermining monetary stability.

This perspective is especially significant as Waller emerges as a potential successor to current Fed Chair Jerome Powell.

With Powell’s term set to end in 2026—and speculation already swirling—Waller’s policy stances and economic philosophy may define the Fed’s next chapter.

In a world increasingly defined by geopolitical risk, onshoring, and industrial policy, Waller is making the case that the Federal Reserve can adapt—without abandoning its core mission of stable prices and full employment.

Conclusion: A New Economic Playbook in the Making?

Christopher Waller’s remarks challenge economic orthodoxy and offer a fresh lens through which to view the inflationary impact of trade policy. His message is clear: tariff inflation is real, but temporary, and does not warrant an overreaction from policymakers or investors.

If his view gains traction, it could clear the way for a more assertive, pro-domestic trade agenda without triggering the inflationary spiral so many fear. And it may further elevate Waller as a central figure in shaping the post-Powell Federal Reserve.

For now, the takeaway is this: the Fed may still cut rates in 2025—and it may do so not in spite of tariffs, but alongside them.

Source Breitbart