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Investing.com -- Fed Governor Christopher Waller said Monday if the impact of tariffs threatens a deep economic slowdown, then he would back a sooner rate cut even if it is accompanied by a jump in inflation.
“If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC’s policy rate sooner, and to a greater extent than I had previously thought,” Waller said in a speech in St. Louis.
The Fed Governor said that he would support rate cuts even if inflation is "well above" the Fed’s 2% target as the risks of a deep economic slowdown outweigh the risk that rate cuts boosting inflation.
"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," Waller added.
Waller also pointed to the possibility of a large tariff scenario, slowing economic growth "to a crawl," while significantly raising the unemployment rate.
But while inflation could rise significantly, potentially reaching a peak close to 5% -- if businesses pass on the costs of tariffs in the coming months -- Waller said he does expected it to return to a "more moderate level in 2026," reiterating his view that tariff-driven inflation could be transitory.
Under a more moderate scenario, in which tariffs are lower such as a 10% baseline across the board, Waller said the peak effect on inflation could be around 3%.