• Fed Governor Christopher Waller expects a temporary inflation increase from recent tariffs, not a permanent shift.
  • Waller advocates for a 25 basis point rate cut at the September FOMC meeting, citing softening growth and labor data.
  • Markets are pricing in an 87% probability of a September cut, with future policy dependent on incoming jobs and inflation reports.

Federal Reserve Governor Christopher Waller stated publicly that while the U.S. is set to experience a “blip” of higher inflation, primarily from recent tariff increases, he does not expect this to become a permanent feature of the economy. He is advocating for the central bank to begin its easing cycle with a 0.25% reduction in the federal funds rate at the September policy meeting.

The call for rate cuts is based on a cooling economic landscape. First-half GDP growth came in at a relatively soft 1.2%, and the unemployment rate has risen to 4.1%. Waller argues that current monetary policy remains more restrictive than necessary and should be moved toward a more neutral stance, which he sees as around a 3% federal funds rate.

Recent inflation data has shown an uptick, with the core Personal Consumption Expenditures (PCE) index—the Fed’s preferred gauge—registering 2.9% annually. Waller and other officials maintain that the underlying inflation trend remains close to the 2% target and that the effects of tariffs are temporary by nature. The standard central banking practice is to "look through" such one-off, supply-driven price shocks when longer-term inflation expectations remain well-anchored.

Market participants are heavily aligned with this dovish outlook. According to the CME’s FedWatch tool, futures markets are pricing in an 87% chance of a rate cut in September. This expectation has provided support to both bond and equity markets, though traders remain sensitive to any surprises in upcoming labor and inflation prints that could force a recalibration.

When reached for additional comment on the timing, a Fed spokesperson declined to elaborate beyond the governor's published remarks. The broader debate among officials continues to center on whether moving too quickly could risk letting inflation become entrenched, or if moving too slowly could unnecessarily harm a labor market that is clearly softening.

Most forecasts, including Waller’s own, anticipate that inflation will slowly increase for a couple more months as tariff effects work their way through the system, with these impacts largely dissipating by early 2026. The path of policy beyond an initial cut will be entirely contingent on the data confirming that the inflation blip is, in fact, transitory and that the economy continues to cool gradually.