In a recent analysis, Federal Reserve Governor Christopher Waller asserted that inflation driven by tariffs is more of a temporary phenomenon than a permanent change in the economic landscape. Waller’s remarks come as the U.S. economy faces high inflation and a tight labor market. He emphasized that tariffs do not fundamentally change the trajectory of the economy, describing their impact as a “splash” rather than a “tide.”
Waller further clarified that tariffs are a one-time tax placed on imported products. That leads to one-time price jumps, but it doesn’t set off a trigger of runaway inflation. In the shoes, tools and appliances would be the kind of products you might generally expect to be affected by tariffs, driving up the price. These impacts, though, are not sustainable over the long term. Tariffs can indeed jolt prices in the short term, but they don’t change the ground economic realities.
February was when American companies first had to deal with the full brunt of the first wave of tariffs. Their answer was to cut profit margins, squeeze suppliers, and hoard products ahead of tariff deadlines. This early response has changed a lot since then. By October, almost 70% of tariff costs will have made their way to consumers. By June, nearly 22% of these increasing costs were already starting to show up in consumer prices.
Waller’s analysis indicates that a 10% tariff would raise PCE inflation by as much as 0.3%. He warned that most of these effects would disappear within a year. While tariffs are increasing prices, they are not a long-run driver of inflation.
Moreover, inflation remains the number one worry. We were encouraged when Federal Reserve Chair Jerome Powell pointed the finger at our labor market — by far our economy’s biggest Achilles’ heel. Meanwhile, Powell and other Fed leaders are preparing to turn their attention to stabilizing the job market. He’s willing to accept elevated inflation rates in the near term to get there, though. This shift to jobs indicates a larger strategy behind keeping Americans employed as the country faces increasing inflationary pressures.
The money markets are now expecting the first reverse by September. Futures markets are all over these futures charts, signaling a dramatic turn in policy. The real danger going forward is inflation’s willingness to play along with these ideological shifts. Waller was clear that tariffs add to the complexity of inflation dynamics. He argues they are throwing a huge headwind to almost every economy.
One year later, inflation has become the bane of every policymaker who expected the answer to be far more simple. As Powell now turns his hawkish gaze on the labor market, further tariff increases would undermine the price stabilization that monetary policy is trying to achieve. The next few months are going to be very important, as the Federal Reserve attempts to thread this very fine needle.
Home Depot’s latest earnings reports are similarly an indication of the growing desperation on inflationary pressures. The company noted “modest price movement in some categories,” an acknowledgment that may indicate underlying challenges in maintaining price stability.
“What was once posturing turned into a reluctant admission: modest price movement in some categories.” – Home Depot
This announcement is an important signal that companies are already feeling the effects of changes in pricing power. Talks on these trends often refer to the concept of “the buffer is breaking.” That could mean conventional economic bulwarks against inflation—raising interest rates, for example—are no longer sufficient to keep it at bay.
The major economic effect of these tariffs is the broad, chilling impact they create. As Waller noted, they function as a headwind tax across every sector of the economy. Their supporters claim these protectionist measures are saving domestic industries. As discussed above, these often resulting price increases increase costs to consumers and can further complicate monetary policy.
The economic theory behind tariffs proposes that markets should “look past it.” In other words, short-term issues will correct themselves naturally given enough time. Waller’s insights suggest that the practice tells a different story: “trade what’s in front of you.” This method even highlights the need to focus on actual market behaviors and conditions instead of theoretical constructs or models.
It’s clear that the Federal Reserve is looking closely at the overall economic environment. Administered improperly, tariffs can have a negative impact on the economy and increase inflation. Waller’s comments highlight an important (and ongoing!) Policymakers need to be mindful of both short and longer-term impacts when developing policies to provide the most opportunity for economic investment and job creation to occur.