Breitbart Business Digest: The Fed May Have Just Made Peace with Trump

Tariffs Won’t Be Inflationary, Says Fed’s Waller

The great clash between Donald Trump and the Federal Reserve may not happen after all.

Contrary to widespread expectations of a coming collision between the soon-to-be inaugurated Trump administration and Federal Reserve policymakers, Federal Reserve Governor Christopher Waller’s remarks on Wednesday suggest that any tension over tariffs and monetary policy may be overstated. The Fed governor indicated that inflation is moderating, further rate cuts are likely, and—perhaps most crucially—he doesn’t believe Trump’s tariffs will stoke inflation.

Waller’s speech, delivered at an OECD event in Paris, struck a confident and bullish tone on the U.S. economy. He described economic growth as solid, highlighting that real GDP had grown above two percent in eight of the past nine quarters, with fourth-quarter growth expected to surpass that mark as well. Since the Fed’s semi-official view is that the longer-run trend is for growth just below two percent, in the Fed’s view the economy is running above potential.

Waller also underscored that the labor market remains near maximum employment, noting, “I continue to believe that the U.S. economy is on a solid footing. I have seen nothing in the data or forecasts that suggests the labor market will dramatically weaken over coming months.”

The solid economic backdrop, combined with what Waller sees as a ongoing slowdown in inflation, has created an environment where he believes gradual rate cuts can continue in 2025. Markets have priced in a cautious pace of easing, but Waller’s comments suggest he sees a clearer path toward the Fed’s two percent inflation target.

The most significant portion of Waller’s remarks was his explicit rejection of the view that tariffs will meaningfully drive up inflation. This stands in contrast to the usual refrain from establishment economists and pundits who insist that tariffs are inflationary and might need to be offset by higher rates.

“If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy,” Waller said.

Moreover, Waller expressed confidence that inflationary pressures would ease further in the coming months. He pointed to the fact that higher inflation readings from early 2024 will soon drop out of annual comparisons, leading to a notable decline in headline inflation. “This should result in a significant step-down in the 12-month inflation numbers through March,” he explained.

Looking Past Imputed Prices: A Key Inflation Twist

A particularly important nuance in Waller’s inflation outlook is his focus on imputed prices versus market prices. Imputed prices, which include categories like housing services and nonmarket services, are calculated or inferred rather than directly observed. These imputed prices, Waller noted, have disproportionately driven above-target inflation over the past year.

“These are a less reliable guide to the balance of supply and demand across all goods and services in the economy,” Waller said. He pointed out that imputed prices account for about one-third of the core PCE basket, while the other two-thirds—representing observed prices—have increased at an average rate below two percent over the past 12 months. In other words, if you strip out the noise from imputed prices, underlying inflation looks much closer to the Fed’s target.

While this suggests that inflationary pressures may not be as severe as headline numbers imply, it’s not clear that imputed prices have more predictive power about future inflation than other measures. Our favorite indicators of underlying inflation—the median and trimmed mean price indexes—still indicate a lot of inflationary pressure and have not eased as much as either the headline or market price figures would suggest.

Fed Minutes: Slower Cuts, Elevated Inflation Risks

Waller’s optimism comes amid a backdrop of heightened caution from other Fed officials. Minutes from the Federal Open Market Committee’s December meeting were released Wednesday. They reveal that while policymakers agreed to cut rates by a quarter-point—marking the third consecutive reduction—many voiced concerns about moving too quickly. Participants cited sticky inflation and resilient consumer spending as reasons to proceed carefully.

Still, the median projection calls for two more rate cuts in 2025, although the range of views of Fed officials is quite diverse. The minutes also revealed that the Fed’s staff incorporated placeholder assumptions about potential Trump administration policies, including tariffs and tax changes. Importantly, these assumptions did not materially alter the inflation outlook, reinforcing Waller’s view that tariffs are unlikely to derail the Fed’s disinflationary progress.

Adding to the prospects for a peaceful accord between the Trump administration and the Fed was Vice Chair Michael Barr’s recent decision to step down from his leadership role as Vice Chairman for Supervision while remaining a Fed governor. Barr, who has been a key figure in bank regulatory policy during the Biden administration, will continue to influence the Fed’s approach to financial oversight. But his departure means that it is less likely that the regulatory priorities of the Fed will conflict with the goals of the Trump administration of fostering a growth-friendly lending environment.

More speculatively, Barr’s departure opens the opportunity for some serious rethinking of how capital requirements can be repurposed to serve the economic needs of the country. While Barr was a somewhat cautious ally in the left’s desire to use bank supervision to push its climate and DEI agendas, Trump’s appointee will no doubt be far less friendly to such views. Instead of tasking banks with assessing their exposure to climate change “transition risk,” a new Trump appointed Vice Chair for supervision could craft capital requirements to encourage fossil fuel energy lending. What’s more, banks can be encouraged to limit their exposure to illegal immigration and businesses that depend on them. The new natalist campaign to encourage higher birthrates could also find a friend in bank regulations more attuned to the risks created by “family unfriendly” business practices.

A Trump Friendly Fed

Despite Waller’s confidence in the economy and his support for further rate cuts, markets remain skeptical. Futures pricing suggests that investors see minimal chances of a rate cut at the upcoming January meeting and expect only one additional cut in 2025. That could change if the December jobs report, due out Friday, comes in deeply disappointing, but jobless claims numbers suggest that is unlikely.

Importantly, Waller’s remarks suggest that fears of an imminent battle between Trump and the Fed may be overblown. With inflation moderating, tariffs unlikely to affect the general price level, and further rate cuts on the table, the central bank appears aligned with Trump’s pro-growth economic goals. Combined with Michael Barr’s reduced role, this sets the stage for a period of relative harmony between the administration and the Fed.

There’s definitely a vibe shift happening. Business confidence is rising, once-woke chief executives are donating to Trump’s inauguration, and Mark Zuckerberg is summarily firing the fact-checkers. Fed officials are openly saying tariffs will not be inflationary, and the most progressive regulators are stepping aside.

Maybe we can all just get along.