The U.S. economy had a solid start to the year, posting modest growth in the first quarter and many inflation readings below 3%.
But the back-and-forth tariff policy by the Trump administration threatens to upend the trends of the first quarter, according to an economic outlook that Federal Reserve Board of Governors member Christopher Waller delivered to a lunch meeting of the Chartered Financial Analysts Society St. Louis on Monday.
Waller said that the effective tariff rate is about 25% when considering the 10% global tariffs and 145% tariffs on China together.
“The current tariff rate is a sharp increase to a level that the United States has not experienced in over a century,” he said. “The primary challenge in analyzing the economic effects of the tariff increases is the considerable uncertainty that remains about size and permanence.”
Waller broke down his outlook into two scenarios: One scenario he laid out considers an average of 25% tariffs lasting long term as a way to shift the U.S. economy back toward producing goods domestically. The other one has the effective tariff rate drop to 10% as the government suspends some tariffs as part of a “concerted effort to negotiate reductions in foreign barriers faced by U.S. exporters,” he said.
“Neither of them are forecasts,” Waller clarified. “I am employing scenarios as a way to frame my thinking about managing the risk of decision-making when the output is as uncertain as it is.”
Regardless of the scenario that eventually plays out, Waller said he expected tariffs to lead to inflation in the short term. He added that it would be more pronounced in the scenario with the effective tariff rate remaining around 25%.
“Inflation would reach a peak close to 5% on an annualized basis in coming months if businesses quickly and completely passed through the cost of the tariffs,” Waller said. “Even if the tariffs were only partially passed on to consumers, inflation could move up around 4%.”
An effective tariff rate of 10% may see inflation jump to 3%, he added. Still, since tariffs are generally understood as one-time price increases, Waller said he wouldn’t expect inflation to persist like it did a few years ago.
He said the tariffs could also drag on the economy as higher prices reduce spending rippling into business investment, adding, “I have heard this repeatedly from business contacts all around the country: Tariff uncertainty is freezing capital spending.”
Waller emphasized the uncertainty of the moment multiple times, calling it one of the biggest shocks to affect the U.S. economy in many decades and one that demands “policymakers remain flexible.”
