• Fed Governor Christopher Waller suggests tariffs near 10% could leave the economy in "good shape" for 2H 2025.
  • Sustained higher rates risk slowing growth, raising inflation, and pushing unemployment toward 5% by 2026.
  • Businesses face uncertainty, while consumers may see limited price pass-through due to budget constraints.

A Delicate Balance for the U.S. Economy

Federal Reserve Governor Christopher Waller framed current U.S. tariff policy as walking a tightrope during recent remarks, noting that average rates hovering around 10% would likely allow the economy to maintain stability through late 2025. However, he cautioned that the Trump administration's blended approach—combining a 10% global average with far steeper China-specific tariffs—could trigger slower output growth and higher unemployment if sustained.

"At these levels, we're still in good shape," Waller said of the 10% benchmark, while adding that "the calculus changes materially" with larger increases. The Fed estimates unemployment could climb to nearly 5% in 2026 under prolonged high-tariff conditions, with businesses facing compounded uncertainty that may depress investment.

Inflation Passthrough Remains Uncertain

While tariffs traditionally cause one-time price jumps rather than persistent inflation, Waller acknowledged the current environment introduces new variables. Consumer spending has shown signs of fatigue, leaving businesses with questionable ability to fully pass along higher import costs. "There’s skepticism about how much will actually reach households," one analyst noted, pointing to already strained budgets.

The Fed continues monitoring whether recent sub-3% inflation readings will hold as new tariffs take effect. Some officials, including Governor Michael Barr, remain divided on whether inflation or employment impacts pose the greater threat. Meanwhile, international retaliation risks loom—a factor that could further dent U.S. export demand.

Historical Precedent Meets New Challenges

Current tariff levels haven't been seen in over a century, making projections unusually difficult. The 2018-2019 Sino-U.S. trade war offers some parallels, having temporarily disrupted supply chains and boosted inflation. But today's economic landscape—marked by exhausted consumers and tighter monetary policy—may amplify those effects.

Private sector responses suggest growing unease. "Every percentage point above 10% makes capital allocation decisions harder," said one manufacturing executive who requested anonymity due to the sensitivity of ongoing supply chain negotiations. Multiple firms confirmed delaying equipment purchases until tariff clarity emerges.

What Comes Next

The Fed's baseline scenario assumes tariffs stabilize near Waller's 10% threshold, allowing modest growth to continue. Should policymakers push rates higher, however, the central bank may face renewed pressure to balance inflation control against protecting employment—a challenge that could reshape the 2025-2026 economic trajectory.

This article was updated to clarify Waller's unemployment projection timeline.