• Fed Governor Christopher Waller suggests rate cuts could be on the table later in 2025 if tariff tensions ease.
  • Persistent tariffs risk slowing economic growth and temporarily pushing inflation near 5%, but Waller views this as transitory.
  • Markets remain sensitive to Fed policy shifts, with recession concerns now outweighing inflation fears.

Fed's Balancing Act on Tariffs and Rates

Federal Reserve Governor Christopher Waller indicated that the central bank could pivot toward rate cuts in the latter half of 2025—but only if the current turbulence over U.S. tariffs "settles down." Speaking at a private economic forum, Waller acknowledged that large, sustained tariffs—like those imposed under the current administration—could slow growth and create a temporary inflation spike, potentially nearing 5%. However, he emphasized that such price pressures would likely be short-lived, allowing the Fed to prioritize supporting the economy over combating inflation.

"If we see a resolution or stabilization in trade policy, rate cuts are very much on the table," Waller said, according to people familiar with his remarks. The Fed has held rates steady at 4.5% in recent meetings, adopting a cautious stance amid conflicting signals from inflation data and weakening demand. But Waller’s comments mark one of the clearest signals yet that policymakers are preparing to act if growth falters.

Market Reactions and Economic Risks

Financial markets have been volatile as investors weigh the dual risks of inflation and recession. Some economists, including Ray Dalio, have warned that the drag from tariffs could tip the economy into a downturn, forcing the Fed to cut rates aggressively. Waller’s remarks suggest the central bank is closely monitoring these risks, though he stopped short of committing to a specific timeline.

Meanwhile, businesses grappling with higher import costs are watching for relief. "A rate cut would help offset some of the demand destruction we’re seeing," said one manufacturing executive, who asked not to be named due to the sensitivity of ongoing trade negotiations. The White House has yet to signal whether it will roll back recent tariff hikes, leaving the Fed in a holding pattern.

Political and Policy Uncertainty

Adding to the complexity, the future of Fed leadership remains uncertain. Chair Jerome Powell’s term expires in May 2026, and the administration has already begun informal discussions about potential successors. This political backdrop could further complicate the Fed’s decision-making, particularly if trade tensions persist.

For now, Waller’s message is clear: If tariffs stabilize, the Fed stands ready to act. But with no resolution in sight, policymakers are keeping their options open.