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Tariff-induced inflation will not be persistent: Fed official
Bank of Korea (BOK) Gov. Rhee Chang-yong, left, and Christopher J. Waller, member of the board of governors of the U.S. Federal Reserve, speaks during a policy dialogue at the BOK headquarters in Seoul, Monday. Yonhap
By Lee Kyung-min
‘One-time price increase will go down quickly, warrants greater focus on real economy’
Any tariff-induced inflation will be short-lived, and inflation expectations remain anchored, prompting the central bank in the world’s largest economy to cut rates later this year, according to a U.S. Federal Reserve (Fed) official, Monday.
A one-time price increase will likely go down quickly, allowing the U.S. monetary policy body to focus more on economic output, Christopher J. Waller, member of the board of governors of the U.S. Fed, said. But the balance between inflation and economic growth will become more critical if the price increase is persistent.
He spoke under the theme of “The Effects of Tariffs on the Three I’s: Inflation, Inflation Persistence, and Inflation Expectations” at the 2025 Bank of Korea (BOK) International Conference. This year’s theme was “Structural Shifts and Monetary Policy.”
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“Given my belief, I support looking through any tariff effects on near term inflation when setting the policy rate,” Waller said during the conference at the central bank headquarters in Seoul.
Adding to the optimism is the strong labor market and progress on U.S. inflation through April.
Personal consumption expenditures (PCE) inflation for April rose 0.1 percent from March, and core PCE inflation without energy and food prices increased by the same amount. Also known as consumer spending, PCE is a measure of the spending on goods and services by Americans.
Compared to a year ago, PCE inflation was up 2.1 percent, while core PCE inflation was up 2.5 percent.
“They give me additional time to see how trade negotiations play out and the economy evolves,” Waller said. “Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2 percent goal and that the labor market remains solid, I would be supporting ‘good news’ rate cuts later this year.”
Bank of Korea (BOK) Gov. Rhee Chang-yong, left, and Christopher J. Waller, member of the board of governors of the U.S. Federal Reserve, talks before a policy dialogue at the BOK headquarters in Seoul, Monday. Yonhap
During a policy dialogue between Waller and BOK Governor Rhee Chang-yong, Rhee asked the Fed official to elaborate further on the prospect of the Fed easing in the coming months.
The U.S. monetary policy decision hinges on the tradeoff between inflation and economic output, in Rhee’s view. So what will happen if the policy impact on inflation proves more sticky and remains above the U.S. inflation target of 2 percent for longer than expected?
The Fed official says the outlook is optimistic, as indicated by the PCE level of 2.1 percent.
“First, let me say I speak for myself. It's not what the Fed should do,” Waller said. “So I mean, for me, if you believe this is a one-time increase in the price level like I said, I prefer to look at market-based measures of inflation expectations then (if) those expectations are anchored, and it's a one-time price effect, then policy should really be looking at the real side of the economy.”
The U.S. prices are close to target, he added. “I just gave you the number for the last 12 months in PCE. We are close. If there's real damage to the economy, in my view, then at that point, we should be focusing on the real side of the economy.”
On the other hand, if inflation turns out to be a lot more persistent, it becomes an issue of a tougher tradeoff, Waller said. “This is what I think you hear from a lot of my other colleagues. They think it's going to be more persistent and so we're facing a very difficult choice right now.”
Still, he said the tradeoff would not be as bad if things unfold as expected.
The elevated U.S. long-term treasury yields are, the Fed official said, attributed to the U.S. fiscal sustainability concerns and risk-off investment sentiment.
“In the U.S., we've had a $2 trillion dollar deficit in the last couple of years. We just can't have a lot of deficits that long persisting," he said.
Waller also said that based on his conversations with business leaders, the tariff cost would not be fully passed through and, instead, the burden will be distributed equally among consumers, importers and exporters. "However, if the tariffs are higher than 10 percent, more of the increase is likely to be passed on to consumers, as businesses face limits in how much they can absorb and still find a way to remain profitable.”