Christopher Waller, a member of the Federal Reserve (Fed) in the United States, predicted that the impact of tariffs on inflation would be short-term and expressed support for the Fed's interest rate cuts in the second half of this year.
Waller delivered a keynote speech on 'the impact of tariffs on inflation and the persistence of inflation, inflation expectations' during the opening session of the 'BOK International Conference' held in the conference room of the Bank of Korea's Jung-gu annex on the 2nd.
He first established scenarios of high and low tariffs related to the flow of tariffs in the United States and estimated the effects on prices, employment, and production. The high tariff scenario assumed an average trade-weighted tariff rate of 25% on imported goods, while the low tariff scenario assumed an average tariff of 10%.
In the high tariff scenario, annual inflation based on personal consumption expenditures (PCE) was projected to rise to 5%. However, this assumes that all tariff expenses are passed on to consumers, and if corporations absorb some of the costs, it is projected to peak at around 4%. The unemployment rate is expected to rise from the current 4.2% to 5%.
In contrast, the low tariff scenario indicated that annual inflation would increase to 3% before gradually subsiding. Although the growth rates of employment and production will slow, it is not expected to rise to 5% as in the high tariff scenario.
Waller noted that 'given the progress in trade negotiations, the current baseline scenario is positioned somewhere between the two extremes,' adding that 'recent court rulings on tariffs have increased uncertainty, but the average trade-weighted tariff rate on imports of U.S. goods is estimated to be about 15%.'
He emphasized that the impact of tariffs on inflation is temporary based on these assumptions. Specifically, Waller explained that 'from an economic perspective, tariffs raise prices once, but do not continue to push prices higher thereafter.'
Waller also stated that the situation today is different from the period of prolonged inflation during the outbreak of the novel coronavirus (COVID-19). He identified three factors that contributed to persistent inflation at that time: labor supply shocks, the prolonged disruption of supply chains, and expansionary fiscal policy, stating that 'none of these three factors currently exist.'
Waller also mentioned that 'the currency policy is also in a very different situation,' stating that 'the Fed has reduced its balance sheet by more than $2 trillion, and the policy interest rate is now over 4%.'
Waller further assessed that expected inflation is being maintained at stable levels. He mentioned that the median expected inflation rate over 6 to 10 years anticipated by experts was 2.2% based on the University of Michigan consumer survey results, adding that 'expected inflation appears to be well anchored.'
Finally, he advised that 'when establishing currency policy, it is advisable to consider the short-term effects of tariffs as temporary factors,' stating that if the tariff rates are maintained at levels closer to the low tariff scenario, with underlying inflation converging to the 2% target and the labor market maintaining a solid flow, he would support interest rate cuts based on positive signals in the second half of the year.