FED: Gov Waller: Cuts Still Expected, Timing And Magnitude Depends On Tariffs

Fed Gov Waller in a speech (link) titled "A Tale of Two Outlooks" lays out two different scenarios for rate cuts depending on how tariff policy develops. So while he's clearly maintaining his easing bias, as one of the most dovish FOMC members, he delineates the two easing scenarios as "good news/lower tariff" and "bad news/large tariff" rate cuts: 

• He cites estimates of an effective tariff rate of 25% today, vs under 3% at end-2024, "a sharp increase to a level that the United States has not experienced for at least a century". He posits two scenarios for the economy and Fed rates under these new tariff rates: "One possibility is that they will remain very high and be long-lasting, near the current average of 25 percent or more, as part of a committed effort by the Administration to engineer a fundamental shift in the U.S. economy toward producing more goods domestically and reducing trade deficits. The second scenario is that the suspensions are the beginning of a concerted effort to negotiate reductions in foreign barriers faced by U.S. exporters that will result in the removal of most of the announced import tariffs, which would reduce the average tariff rate to around 10 percent. This latter scenario had been my base case up until March 1."
• Under the large tariff scenario (25% tariffs remaining through at least 2027), core PCE could peak at 4-5% "in coming months" depending on passthrough to consumers, but moderate in 2026 so long as expectations remain anchored. He notes wryly given the return of the term "transitory" after the 2021-22 high inflation episode: "Yes, I am saying that I expect that elevated inflation would be temporary, and "temporary" is another word for "transitory.""
• Higher tariffs would entail larger and earlier cuts: "While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy. If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC's policy rate sooner, and to a greater extent than I had previously thought. In my February speech, I referred to this as the world of "bad news" rate cuts. With a rapidly slowing economy, even if inflation is running well above 2 percent, I expect the risk of recession would outweigh the risk of escalating inflation, especially if the effects of tariffs in raising inflation are expected to be short lived."
• And besides weaker growth induced by tariffs, Waller sees lower productivity as investment weakens and is allocated "according to trade policy and not towards its most productive and profitable uses". His conclusion is that a  "fall in productivity would likely lower estimates of the neutral policy rate, making the current policy rate more restrictive than it is currently."
• In the smaller tariff scenario, the peak effect on inflation could be lower (around 3% annualized), with limited effects on economic activity - " I would support a limited monetary policy response". For the FOMC that means "room to adjust policy as progress on the underlying trend in inflation is revealed in price data. With the threat of a sharp slowdown or recession diminished, pressure to reduce rates based on falling demand would diminish also. That is, the policy response in this scenario could allow for more patience....In this case, "good news" rate cuts are very much on the table in the latter half of this year."