MNI BRIEF: Fed's Waller Sees Cuts Sooner If Unemployment Jumps

Employment could deteriorate quickly as inflation rises in the second half of the year if President Trump's April 2 reciprocal tariffs do end up going into effect, potentially leading to "more rate cuts and sooner," Federal Reserve Governor Chris Waller said Thursday, saying the tariff price increases are likely to be transitory. 

"I'm not going to overreact to any increase in inflation that I think is attributable to the tariffs, but if I see a significant drop in the labor market and the employment side demanded it's important that we step in, and I said this last week in my speech, I would expect more rate cuts and sooner once I started seeing some serious deterioration," he said in a Bloomberg Television interview.  

If the unemployment rate begins rising two-tenths or three-tenths a month, then it's a sure sign that high tariffs are generating layoffs, Waller said. "I'm more concerned about the speed at which the unemployment rate starts going up, and if there's a big reaction, big tariffs, it could go up very quickly," he said. Waller said the unemployment rate increase and the one time rise in prices might happen roughly around the same time. 

"It'll take some courage to stare down these tariff increases in prices, with the belief that they are transitory," he said. "We all have 2021 in our minds." Waller pointed to Monday's market reaction as a reason for why central bank independence is important and said the President is free to give his opinions. 

If tariffs stay at their current rate of 10% to 12%, Waller said most firms he's spoken to say "they can deal with it." He added he expects "some softening in the data" but likely not "anything dramatic" in the real data, until after the start of July. Trump's 90-day pause on the April 2 tariffs are set to expire in July. (See: MNI INTERVIEW: Fed Needs More Hawkish Message - Emmons)