New tariff policy is one of the biggest economic shocks in decades
March PCE 12-month inflation likely 2.3%; core PCE likely 2.7%
In Q1:
Economy grew modestly
Labor market remained solid
Inflation was too high but showing slow improvement
Monetary policy is meaningfully restricting economic activity
Hopes underlying inflation will continue to moderate
Inflation expectations remain anchored
Expects inflation to return to a more moderate level in 2026
Partial tariff suspensions increase uncertainty and complicate timing
Policy outlook is highly uncertain — Fed should remain flexible
Tariff scenarios and implications:
Smaller tariff scenario:
Fed could be more patient
Rate cuts could happen in the latter half of the year
10% average tariff scenario:
Inflation could peak at 3%
25% average tariff scenario:
Inflation could peak near 5%
Drag on output and employment could be long-lasting
Unemployment could rise to 5%
Believes higher inflation from tariffs will be temporary
Waller comments are more detailed and warn of higher inflation but still sees inflation as temporary.
Here is what he said about the resurrection of Team Transitory:
“I can hear the howls already that this must be a mistake given what happened in 2021 and 2022. But just because it didn’t work out once does not mean you should never think that way again. Let me use a football analogy to characterize my thoughts. You are the Philadelphia Eagles and it is fourth down and a few inches from the goal line. You call for the Tush Push but fail to convert by running the ball. Since it didn’t work out the way you expected, does that mean that you shouldn’t call for the Tush Push the next time you face a similar situation? I don’t think so. With the history of 2021 and 2022 still in my mind, I believe my analysis of the effect of tariffs is the right call, and I am going to stick with my best judgment.”
