US May Require Rate Cuts If Big Tariffs Return: Fed Top Official
Washington DC: The Federal Reserve may need to cut interest rates sharply to prop up the US economy if Donald Trump follows through on his threat to resume big “reciprocal” tariffs, a top Fed official warned on Monday.
Christopher Waller, the Federal Reserve governor said that if the US president reimposes the levies unveiled on April 2, then the US central bank would be forced to quickly make a series of “bad news” rate cuts.
Trump last week suspended the “reciprocal” tariffs for 90 days shortly after they were imposed amid market ructions over measures Waller said would put the effective levy on US imports at more than 25 percent—up from 3 percent in December 2024.
The US at the weekend temporarily excluded phones, chipmaking equipment and certain computers from the reciprocal tariffs.
Waller said that if Trump applies big reciprocal tariffs after the pause, US economic growth would “slow to a crawl”, while the unemployment rate would rise “significantly” from 4.2 percent to 5 percent next year.
He said he believed that, while inflation could rise as high as 5 percent in the near term, any hit to price pressures would prove fleeting — paving the way for Fed cuts to weigh against the impact of an economic slowdown.
“While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy,” said Waller on Monday. “If the slowdown is significant and even threatens a recession, then I would expect to favour cutting the . . . policy rate sooner, and to a greater extent than I had previously thought.”
Waller’s views clash with those of other members of the policymaking Federal Open Market Committee—several of whom believe that there is a risk of a persistent surge in inflation because of the tariffs. While Trump as paused the “reciprocal tariffs”, many levies remain, including on steel and aluminium imports and many goods from China, the world’s biggest exporter.
Other FOMC members have stuck by a “wait and see” approach to lowering borrowing costs, saying that they would need to see evidence in the hard data of a slowdown before responding.
Trump has persistently called on the Fed to cut interest rates, taking aim at chair Jay Powell, who the US president has accused of acting too late in lowering borrowing costs.
The US central bank has kept interest rates on hold at a 4.25 to 4.5 percent range since the turn of the year, amid signs that the new administration’s trade policies will raise inflation and stunt growth.
However, Waller’s views on the rise in unemployment echo a New York Fed poll of consumer sentiment published earlier on Monday, which showed 44 percent of people now think unemployment will rise in the next year. The figure is the highest since the pandemic and is up 10 percentage points since Trump took office.
news