Given that a rise in inflation pressures tied to President Donald Trump’s import tax increases is unlikely to be persistent, "I support looking through any tariff effects on near term-inflation when setting the policy rate," Waller told a gathering in Seoul, South Korea.

If tariffs settle in the lower end of the range of possibilities and "underlying inflation continues to make progress to our 2% goal" with a still "solid" job sector, "I would be supporting ‘good news’ rate cuts later this year," Waller said.

He added, “Fortunately, the strong labor market and progress on inflation through April gives me additional time to see how trade negotiations play out and the economy evolves” before needing to decide what the central bank should do with interest rates.

Waller’s comments on the outlook for the economy and monetary policy hew close to his recent comments and come amid considerable uncertainty about the president’s trade policy.

Trump has made large and unpredictable shifts in tariff rates as well as their timing. At the same time, the tariff system is facing legal challenges that could ultimately blunt the entire endeavor.

Economists and Fed officials generally believe the tariffs will push up unemployment and inflation while slowing growth. The tax increases have also called into question whether the central bank will be able to deliver any cuts to what is now a federal funds target rate range of between 4.25% and 4.5% this year.

Waller's openness to cutting interest rates later this year if economic conditions allow it contrasts with other central bankers, who have taken a cautious wait-and-see attitude.

NEAR-TERM TURBULENCE

The economy has thus far seen very little impact from tariffs, but that could change, Waller said.

"I see downside risks to economic activity and employment and upside risks to inflation in the second half of 2025, but how these risks evolve is strongly tied to how trade policy evolves," Waller said.

"Higher tariffs will reduce spending, and businesses will respond, in part, by reducing production and payrolls," he said.

The Fed official said while tariffs will be the main driver of inflation, they are likely to be one-time increases "most apparent in the second half of 2025." In the case of more modest duties in the range of 10%, some portion of the rise will not be fully passed through to consumers.

Waller also said the risks of a "large" tariff scenario imposed have gone down.

The central banker also argued that one reason why there may be anxiety over how tariffs will impact inflation is due to misplaced confidence during the pandemic that price pressures seen then would be short-lived.

"What often has people spooked is we had the same view in 2021, that all this stuff was transitory, it was a one-time level effect, and then it would all go away," Waller said. "And that just turned out to be wrong."

But he noted that the factors that made inflation gains persistent then aren't in place now.

Waller also flagged what have been divergent readings on inflation expectations. He said he more closely watches market views and those of professional forecasters, both of which expect price pressures to remain contained, than surveys. Waller noted real-world data is also not showing much deterioration in the expected path of inflation.

The Fed official also weighed in on the rise in bond yields, which have come amid a general rise in caution about dollar-denominated assets amid Trump's trade actions.

Waller tied higher borrowing costs to concerns about rising government borrowing as well as U.S. openness to foreign investment.

"There seems to be an attitude that foreign buyers of assets are not welcome in some sense," he said, referring to some communications from government officials.

He added, "there's been a risk-off attitude from foreign buyers of Treasuries, all U.S. assets ... It's not really that big, but it's definitely there."