• Federal Reserve Governor Christopher Waller acknowledged recent inflation increases but expressed confidence prices will begin declining.
  • Core inflation measures excluding tariffs show a more moderate picture, running around 2.4-2.5%.
  • The Fed's latest projections anticipate inflation returning to the 2% target by 2028 despite near-term pressures.

Federal Reserve Governor Christopher Waller struck a cautiously optimistic tone on the inflation outlook, noting that while price pressures have ticked up recently, he believes they are poised to start coming down. The comments come as the central bank navigates a complex inflation landscape where trade policy has emerged as a significant factor.

Speaking to financial industry participants, Waller highlighted that when tariffs are excluded from the calculation, underlying inflation is running around 2.4% or 2.5%. This distinction suggests that much of the recent upward pressure stems from trade policy rather than broader economic overheating. The personal consumption expenditures index, the Fed's preferred inflation gauge, stood at 2.7% for the 12 months ended in August.

"We're seeing some temporary factors at play," Waller said, according to people familiar with his remarks. "The underlying trend remains more favorable than the headline numbers might suggest."

The Federal Open Market Committee's most recent projections show median headline PCE inflation at 3.1% for 2025, with a gradual return to the 2% target anticipated by 2028. Core PCE inflation follows a similar trajectory, also projected at 3.1% for this year before declining to 2.0% over the coming years.

Market participants have been closely watching for signals about the Fed's policy path following October's 25 basis point rate cut, which brought the federal funds target range to 3.75%-4%. The Committee emphasized at that time that uncertainty about the economic outlook remains elevated, even as it maintains commitment to returning inflation to its 2% objective.

Economic growth projections have been revised modestly upward since June, with real GDP now expected to expand by 1.6% in 2025. This modest growth environment, combined with the Fed's current policy stance, supports the view that inflation can decline without significant economic disruption.

Waller's comments suggest the Fed sees current inflationary pressures as largely temporary and policy-driven rather than structural. The distinction between headline and ex-tariff inflation levels indicates that once tariff impacts stabilize, underlying inflation pressures should ease more noticeably.

A spokesperson for the Federal Reserve declined to provide additional comment beyond Waller's published remarks. The central bank's next policy meeting is scheduled for December, where updated economic projections may reflect this evolving inflation assessment.

Correction: An earlier version of this article misstated the timeline for inflation returning to the 2% target. The Fed projects this will occur by 2028, not 2027.