On April 14, Federal Reserve Board Member Waller made a rare admission in his speech, acknowledging that the Trump administration's tariff policy could force the Federal Reserve to consider cutting interest rates even if inflation does not show a significant decline, to counter a potential economic recession. This statement has caught the market's attention widely as it suggests that the Fed's traditional policy framework—“no rate cuts without inflation decreasing”—might be broken.
Waller stated that the current situation faced by policymakers is very complex and may lead to a "dilemma." He described two possible policy paths: If comprehensive tariffs are implemented, the U.S. economy might come to an “almost standstill,” with unemployment possibly soaring to 5%. In such a scenario, even with persistent high inflation, the Federal Reserve might have to cut rates to prevent further economic deterioration. Conversely, if the impact of tariffs is limited to around 10%, economic growth will slow mildly, allowing the Federal Reserve to execute planned rate cuts in the latter half of the year.
Waller pointed out that this is the greatest challenge the U.S. economy has faced in decades, describing policymakers as dealing with the "elephant in the room"—making difficult choices between inflation pressures and recession risks. He emphasized that if recession risks become more pronounced, he would support earlier-than-expected rate cuts, and might even advocate for significant cuts even if inflation has not reached the 2% target.
This statement has completely overturned previous market perceptions. Typically, the Federal Reserve adheres to using rate hikes to control inflation rather than adopting a loose policy in times of high inflation. Waller's comments suggest that the Federal Reserve may shift its policy direction to tackle the potential economic shock from tariffs. If the impact of tariffs is minor, the possibility remains for the Fed to cut interest rates three times in the latter half of the year as originally planned.
Currently, the Federal Reserve's interest rates are within the range of 4.25%-4.5%, and Waller's speech suggests that the policy balance might begin to tilt. Analysts believe that if the Federal Reserve adopts a "recession before inflation" policy, it could lead to a depreciation of the dollar and a rise in gold prices. Additionally, Waller mentioned that the current economic situation complicates policymakers' ability to make clear forecasts, which also implies that market volatility may intensify.
In summary, Waller's speech has undoubtedly dropped a "policy bomb" on the market. Investors need to closely watch two key variables: the final scale of the Trump administration's tariff policy and the Federal Reserve's moves at the June FOMC meeting. Any related developments could trigger significant market volatility and even a major shift in global monetary policy.
