Waller urges quick rate cuts, but tariffs cloud the Fed’s path

Markets bet on a rate hold despite hawkish signals
Weakening labor data destabilizes near-term policy expectations
High tariffs reignite inflation pressures

Christopher Waller, a member of the Federal Reserve Board of Governors, ignited debate over the central bank’s policy outlook by arguing that a rate cut is needed in December. With forecasts of slowing nonfarm payrolls, reduced hiring across industries, and internal Fed assessments pointing to labor-market deterioration, the slowdown is increasingly seen as a given. Yet tariff-driven inflation is weakening the case for near-term easing. With high tariffs imposed by the Trump administration pushing up consumer prices—particularly for essentials—and widening consumption disparities, there is growing sentiment that the Fed must prioritize inflation risks.

Futures markets price in a 57% chance of a December rate hold

Speaking at an annual dinner hosted by a leading economics association in London on the 17th (local time), Waller said, “We are clearly seeing signs of weakening labor demand in the recent data,” adding that current monetary policy is weighing heavily on middle- and lower-income households, making a rate cut necessary. He argued that a 0.25 percentage point cut at the December FOMC meeting would be appropriate, calling the adjustment “an insurance measure” to soften the pace of labor-market weakening.

Waller emphasized that core inflation is moving closer to the Fed’s target while high mortgage rates, auto-loan rates, and credit-card interest burdens are eroding disposable income for middle- and lower-income households. Citing recent months of slowing job growth and cooling indicators for job openings and quits, he stressed that “labor-market weakening is already underway and unlikely to reverse quickly.” His argument is that monetary policy should adjust preemptively rather than reacting after the slowdown has fully materialized.

But this view diverges from the stance of many Fed officials. Chair Jerome Powell and several other policymakers have repeatedly warned that “additional easing should be approached cautiously,” emphasizing the need to balance inflation and labor risks. Susan Collins, president of the Boston Fed, and Jeffrey Schmid, president of the Kansas City Fed, similarly argued that during periods of limited data clarity, keeping rates at current levels for longer is more prudent. Their concern is that premature easing—when inflation remains above target—could combine with tariff-driven price increases to lift inflation expectations again.

Markets are siding with the more cautious path. According to CME FedWatch, the futures market now places the probability of a 0.25 percentage point cut in December at 42.9 percent, while the likelihood of a rate hold has climbed to 57.1 percent, up sharply from 37.6 percent a week earlier. Just before the late-October FOMC meeting, the market was pricing in roughly a 90 percent chance of a December cut, but expectations have collapsed in recent weeks. On Wall Street, the view that the Fed will hold rates in December and re-design its easing path is gaining traction, solidifying expectations for a cycle that begins “later and more gradually” than previously anticipated.

Clear deterioration in labor data deepens the cooling sentiment

Waller’s diagnosis of a weakening labor market is meeting little disagreement. BlackRock noted in a recent weekly report that October’s nonfarm payroll decline could be driven by the federal-government restructuring anticipated earlier this year but delayed by administrative processes—changes that may all be reflected at once. Because the government’s fiscal year begins in October, large public-sector job cuts often cluster in that month. BlackRock added that even accounting for such distortions, the broader trend of softening labor demand is unmistakable, describing the current phase as “no hiring, no firing,” where layoffs occur gradually while new hiring remains stagnant.

Real-world indicators point the same direction. New York, home to big tech and fintech firms such as Amazon and Salesforce as well as many AI companies, has seen a noticeable rise in layoffs as prolonged economic weakness and automation take hold. Amazon alone has cut 14,000 office jobs in the second half of this year, while Salesforce announced layoffs affecting 4,000 customer-support roles. Even when job postings appear, many are temporary or internship-based with no path to full-time employment, sparking debate over so-called “ghost jobs.” As a result, New York’s perception of job-market conditions continues to deteriorate.

Fed officials themselves acknowledge these signals. Vice Chair Philip Jefferson recently said that “the balance of risks around the labor market has clearly shifted downward, while upside inflation risks appear somewhat moderated.” He noted that policy rates are approaching neutral territory following the last two cuts and emphasized that future decisions should be made carefully, meeting by meeting. He added that even if headline inflation rises temporarily because of tariff-driven price increases, underlying inflation trends remain aligned with the Fed’s target.

Viewed in this context, deteriorating labor data both strengthens Waller’s case for a rate cut and increases uncertainty around the Fed’s near-term path. If October’s slowdown was driven by timing factors—delayed reporting or administrative clustering—the Fed is likely to interpret it alongside alternative indicators highlighted by BlackRock rather than drawing immediate conclusions. Markets, too, expect the Fed to recognize the reality of a softening labor market while avoiding aggressive easing, instead watching inflation and tariff risks closely and adjusting the pace more cautiously.

Rate-cut odds fall if inflation pressures re-emerge

Another critical variable is the inflation outlook. Under the second Trump administration, high tariffs were imposed on nearly all major trading partners and categories, raising import costs across the board and adding a new layer of pressure atop already persistent post-pandemic inflation. The September CPI rose 3.0 percent year over year—still well above the Fed’s 2 percent target. Price increases were particularly sharp in categories heavily exposed to tariffs, such as groceries, dining out, and low-cost apparel, with low-income households experiencing disproportionately high perceived inflation.

Specific cases illustrate the impact more clearly. According to market research firm CoStar, luxury hotel revenue rose 2.9 percent year over year in the second quarter, while budget hotel revenue fell 3.1 percent. Delta Air Lines reported a 5 percent decline in economy-class revenue but a 5 percent increase in premium-class revenue during the same period. This divergence suggests growing spending power among higher-income consumers, while lower-income households reduce expenditures. The Harvard Joint Center for Housing Studies found that renters earning less than $30,000 annually have a median residual income—excluding housing costs—of only $250 per month, arguing that tariffs function as a regressive tax disproportionately harming low-income households.

An examination of the tariff structure shows the scale of potential inflationary pressure. A Yale Budget Lab analysis estimated that the Trump tariff system, which imposed average double-digit rates on the top 15 trading partners, could raise consumer prices by roughly 5 percentage points. Across steel, aluminum, copper, lumber, furniture, and other key manufacturing inputs, tariffs climbed as high as 50 percent, pushing up prices throughout downstream industries. The study estimated that if the tariff regime remains in place, households could face annual real-income losses of around $1,800, noting that companies may absorb some margin pressure in the short term but will ultimately pass substantial portions of the cost to consumers.

The timing presents additional challenges for the Fed. With about 20 days remaining before the December FOMC meeting, data on October and November CPI, PCE inflation, and tariff pass-through ratios are expected to be released in rapid succession. These reports could reveal that headline inflation has bounced again. The Fed would then face the dual task of distinguishing between tariff-driven price jumps and underlying inflation trends. Above all, policymakers want to avoid being seen as misreading inflation signals by cutting rates prematurely. This is why many analysts now argue that “if tariff-driven inflation materializes more clearly, a December rate cut becomes even less likely.”