Insights 
VT 
Governor Waller, in his economic outlook speech, stated that rate cuts could still happen later this year. This decision depends on easing inflation and stabilising tariffs. The strong economy through April offers the Federal Reserve some time to assess trade outcomes.
Tariffs might cause a one-time price rise that the Fed can disregard. However, uncertainty remains concerning trade policy, with potential risks to both the economy and job market. Tariffs are expected to drive inflation this year and may increase unemployment with effects persisting. The impact of tariff-induced inflation will likely be most noticeable in the latter half of 2025.
Focus on Inflation Expectations
Waller emphasised that he focuses on market and forecaster views on inflation. He downplays the long-term effects of tariffs on inflation, considering their price pressures temporary. Despite some surveys indicating consumers expect higher inflation, Waller suggests the current labour market lacks sufficient power for workers to demand raises. Therefore, Waller remains open to rate cuts later this year, aiming to overlook any tariff-related inflationary pressures, even if the job market remains stable.
Waller’s comments help clarify how the central bank is weighing current price movements. In plain terms, he believes the inflation caused by new tariffs may be sharp but unlikely to last. What matters more, according to him, is whether that inflation sticks around, not whether it shows up once and then fades. That distinction allows policymakers to stay patient rather than responding too quickly with higher interest rates again.
The Fed can afford to step back right now because recent economic data, through April, show solid momentum. That gives space to wait for more clarity. In times like this, when market expectations are adjusting easily and bond market indicators remain anchored, the focus shifts to smaller details—like whether wage growth keeps lagging weekly price increases or if it buckles under the surface. That balance, according to Waller, suggests inflationary risks aren’t spiralling and justifies holding off on any sharp reaction.
Though some surveys hint that households expect prices to climb, parts of the market Waller watches are saying otherwise. We can understand the gap here. Survey-based expectations often swing around news in headlines, especially tariff announcements. But forward-looking measures built into asset prices still look contained. That makes the latter more trustworthy in the current environment, in our assessment.
Impact on Short Term Rates Markets
That brings us to the question of how these dynamics affect positioning in short-term rates markets. We began this month pricing in a possible return to easing, but expectations wobbled as tariff headlines piled in. Looking more closely at how the central bank is weighing those same risks — and selectively ignoring them when they seem temporary — offers a clearer filter. It tells us that data sensitivity will matter more than headline sensitivity going forward.
If tariffs start to pass through in a broad-based way and show up beyond import prices—say, in services or wage data—then we will expect a shift in tone from policy officials. But we are not there yet. High-frequency inflation readings, if anything, have been cooling since March. And when unit labour costs came in weaker than some had forecasted, it helped to reinforce Waller’s argument.
Therefore, watching the rate of change in inflation—not just the level—becomes essential in the coming weeks. At the same time, employment indicators are relevant primarily in how they reflect consumer resilience rather than wage-driven pressure. Policymakers are now watching for whether cooling job gains reduce excess spending capacity without threatening overall consumption.
In fixed income and derivatives markets, that means volatility will likely be tied more to upside surprises in price data than downside ones. A modest drift lower in inflation won’t lead to immediate action—those paths have already been telegraphed. But if inflation readings undershoot aggressively, that would bring back bets on earlier cuts. The risk—as Waller has subtly acknowledged—is in overreacting to short-term forces, or anticipating inflation stickiness where it doesn’t exist.
The period ahead will probably favour reaction times over conviction levels. There’s very little reward in anchoring tightly to a view, especially one that dismisses softer data. But equally, markets shouldn’t lean too hard into noisy inflation prints. We’ll be reading the data the same way policymakers do: running a filter for persistence, not drama.
