Christopher J. Waller argued that the effect of tariffs on prices could be short-lived, but he warned about a bigger hit to growth.
Tariffs of the magnitude that President Trump has enacted are poised to raise inflation in the United States. Whether it will be a temporary surge or one that spirals into a more serious problem is not yet clear, echoing a similar debate that bedeviled officials at the Federal Reserve during the coronavirus pandemic.
Back then, the Fed initially billed the rise in inflation stemming from business shutdowns and supply chain snarls as “transitory,” an approach that led the central bank to be late in raising interest rates when it became clear that price pressures were persistent.
One influential official at the Fed is reviving that view. In a speech on Monday, Christopher J. Waller laid out two scenarios that may play out for Mr. Trump’s tariffs, which the Fed governor described as “one of the biggest shocks to affect the U.S. economy in many decades.” How these levies impact both inflation and growth will impact how soon the Fed can again lower interest rates.
If a recession appears to be taking shape, Mr. Waller said he would support the Fed cutting interest rates “sooner and to a greater extent” than initially expected.
The first scenario Mr. Waller laid out assumes that the average tariff imposed on U.S. imports remains around its current level of 25 percent for an extended period. The second assumes a more modest 10 percent universal tariff, as other levies are removed over time.
In both cases, Mr. Waller argued, the effects on inflation would not persist so long as expectations about future price pressures remained under control.