Fed Governor Christopher Waller Talks Tariffs and Labor Market
12:38 Share

When you're with Amex Business Platinum, going the extra mile for your business pays off.

With five times membership rewards points on flights and prepaid hotels booked through amxtravel.com, you can earn more points to help grow your business. And with access to more than 1,400 lounges globally through the American Express Global Lounge Collection, including the Centurion Lounge. Can I get you a refill? You can stay fresh wherever your business travel takes you. That's the powerful backing of American Express. Terms apply. Learn more at americanexpress.com slash amxbusiness.

Bloomberg Audio Studios. Podcasts. Radio. News. Let's get back now to Bloomberg's Michael McKee in Washington. He's sitting down with Fed Governor Christopher Waller. Mike? Well, thank you very much, and welcome to Bloomberg Television and Radio Worldwide. Chris Waller, thank you for taking the time to come in today. Yeah, thanks, Mike. I appreciate having me on.

You gave a speech a short time ago in which you said tariffs are the elephant in the room. The elephant seems to have only gotten bigger. You told me you were in St. Louis yesterday for a Fed Listens event, which is supposed to be about your framework review, and all anybody wanted to talk about was tariffs? Yeah, that's pretty much the talk of the town. It's kind of hard not to...

talk about the economy without having to address it. Well, the Beige Book yesterday addressed it, used the word uncertainty 80 times in that. Companies talking about not growing, but possible layoffs, getting ready to do something to try to mitigate the effects of tariffs. Are you seeing, are you hearing the same things from companies that they're sort of

stepping back and just sitting on the sidelines? - Yeah, and that's the general tone of every person I've talked to out in the private sector is that they're just kind of frozen by what's gonna happen with tariffs. And so CapEx, everything has just come to a stop. It doesn't mean it won't happen later.

when there's a little more clarity, but it has actually just stopped. If the tariffs, the large tariffs had stayed on or come back on, then firms are trying to figure out how they're going to absorb some of that cost

And the minute they do that, they're looking at other ways to cut costs, and labor's obviously one way they do that. So it wouldn't surprise me that you might start seeing more layoffs tick up in the unemployment rate going forward if the big tariffs in particular come back on. The smaller tariff world of 10 to 12%, most of the firms I talk to

They figure out they can deal with it. They kind of often give me this kind of formula. Our suppliers will eat a third of it, we'll eat a third of it, and we'll pass a third of it on to consumers. So if you're talking about a 10% to 12% tariff, it's not a big price hit to the consumers if that's all they pass through. But economics tells us that tariffs in general are not good. So even if we get the smaller tariffs, does that still leave business on the sidelines and profitable?

growth prospects lower? Well, it is a tax and it's inevitable that there's a tax. But however, I've always tried to tell people that, you know, given the fiscal situation we're in, we need to get some better control of the budget deficit. And that means some combination of taxes and spending. It's just an argument about what taxes do you want to have to raise. So nobody likes taxes. I don't like taxes.

But if you're gonna get any kind of fiscal situation, you're gonna have to have some tax revenue. And there's no obvious reason why tariffs should be off the table per se. - We have some tariffs in place, even though the president goes back and forth about other tariffs, but he put some on in March. When do we start to see that in the hard data? - Well, by taking off the April 2nd tariffs, you postpone that decision until July.

So we'll see some of the 10% tariffs and the auto tariffs, some of that will start coming through particular sectors. But it's not likely to me that by July 1st, you're going to see really big impacts from it. You will see, like I said, in CapEx and things like that have just been put off to the side. So you'll probably see some softening in the data, but you're probably not likely to see anything dramatic happen.

before we get a better decision from the administration what they're gonna do with the big tariff package that they initially proposed on April 2nd. - Well, what will we see first, a big rise in inflation or a slowdown in growth perhaps, epitomized by the unemployment rate? - I think you could see both of them almost happen at the same time, just in the sense of, like I said, that firms have to make a decision right away to pass through. Now, a lot of firms told me they have

price contracts so they're protected for a little while until they have to renegotiate those price contracts. But they're all anticipating, particularly the bigger tariffs, they're all anticipating they're gonna have to cut costs somewhere. And the easiest thing to do when firms have 65 to 70% of their cost is labor, to start shedding some labor. So you might see layoffs start to happen about the same time you start seeing prices going up. So I'm not so convinced that it's gonna be one first and then the other.

You can see them both happen roughly at the same time. We're very close together. I assume that we're not going to see any move from the Fed on May 7th, but when would you have enough data, you think, to be able to make a decision one way or another on whether you need to move rates? Well, as I was saying, the president's put off any decision on the large tariff world that was proposed on April 2nd until July.

So all you're going to see probably until July is whatever the existing tariffs are in place. And as I said, I don't think you're going to see enough happen in the real data in the next couple of months until you get past July. When you get to the second half of the year, I think we'll start having better ideas what's going to happen with the tariff world that the administration's considering. And by then, you'll start seeing more in the form of tariff price pass-through and also tariff

stuff on the real side. But there's not like you're not gonna see anything on the real side because of all the uncertainty in terms of freezing decisions, spending decisions. - Well let's put some parameters around your thinking. On the employment mandate side, what level of unemployment would bother you?

Well, it's more the speed at which it would start going up. I mean, if it just ticked up one-tenth, ticked up one-tenth, ticked up one-tenth, kind of like what we saw last year, it would be concerning, but it wouldn't be a big problem. But if it starts going up two-tenths, three-tenths a month, then that's going to happen because you're seeing layoffs starting to take off. And the labor market's in kind of a good spot. It's not like 2022 where you could reduce vacancies.

Now, if labor demand pulls back, it's going to be in terms of bodies. So you'll see employment start to drop. So I'm more concerned about the speed at which the unemployment rate starts going up. And if there's a big reaction to big tariffs, it could go up very quickly. Four and a half percent is, I guess, the SOM rule trigger. Would that be a trigger for you?

You know, I gave a speech last September where I kind of discounted the SOM rule as a mechanical description of the data and what it really is capturing is shocks that hit the economy. A big tariff regime being put back on in July and being put in place for the foreseeable future, that would be that kind of a big shock.

So, it's not so much the SOM rule as the fact that the SOM rule is really always picking up some big shock to the economy. And the big tariff regime, as it was on April 2nd, would end up being a big shock to the economy. Well, on the inflation mandate side, since you expect some inflation from tariffs, is it the speed with which it rises as well? Because we've seen a lot of volatility in inflation numbers recently.

Yeah, that's been the struggle for me for the last basically 18 months is that inflation progress to our 2% goal has been this kind of seesaw. You're making progress going down, but then you get a couple bad months, then it comes back down. And it's just slower than I ever thought it would have been, say, in December of 23. But the tariffs are a one-time. I still strongly believe, just the economics tells me, that the tariffs are a one-time price-level effect that

that's gonna pass through. Now, it's one time level doesn't mean it's small or big, it's just a one time. So I still think even if it was fairly large, you would see a one time price level effect.

The demand slowdown would offset some of that. As consumers back off, employment goes down, unemployment rises, wealth continues, financial wealth declines, you will see demand effects from that that'll put downward pressure on inflation. So it may not be as high as people think. But the critical thing is it's going to be... It's going to be...

take some courage to stare down these tariff increases and prices with the belief that they are transitory. I'm not going to lie that we all have 2021 in our minds when we think about how we can go forward. But...

You know, the question is what are the things that will cause this inflation to persist through the initial tariff increases? And I just have a hard time seeing exactly what that would be. Well, do you think if we start to see the economy slow that you would be more reluctant to cut rates because you expect

that tariffs and higher inflation will come down because of the demand effect? - See, I'm willing to look through whatever tariff price effects there are, and I've said that. So for me then, I'm not gonna overreact to any increase in inflation that I think is attributable to the tariffs.

But if I see a significant drop in the labor market, then the employment side of the mandate I think is important that we step in and we would have to start, I said this last week in my speech, I would expect more rate cuts and sooner once I start seeing some serious deterioration in the labor market. - Now some people looked at your speech last week and said Chris Waller's on the opposite side of all this from Chair Powell.

Do you think there's division on the Open Market Committee about what should be done? Well, that's the beauty of not having group think. People have different views about how the economy is evolving and how policies should be done. I think that's actually a healthy thing. As far as I've heard exactly that comment that Waller's outside of consensus, away from the chair, and I've had other people tell me I didn't really hear much different from what the chair said two days later.

This is always a funny thing about communication. I can say something, and people perceive it one way to the left, or they perceive it the other way to the right. So how people receive what I say is not always one clear vision of what it is. So I'll leave it up to people to decide whether there's a difference between the chair and I. But all I can do is say what my views are, and I try to be very clear what they are. A lot of people are thinking at this point that...

Trump being Trump and Mercurial, that the tariffs could change at any moment. Would you be reluctant to move rates not knowing that you've got any certainty about what's going to be happening? Well, like I said, what we're going to look at is the data. I mean, that's how we always determine. Does that leave you behind the curve? You know, there's always that risk. You're looking at these things like, if there's inflation going to get worse, is unemployment going to get worse? It's a balancing act.

to make that decision. Hopefully you're not late. And I think if we saw, that's what I said, if I saw enough movement in the unemployment rate to make me think that things were going bad

or growth prospects started tanking, or consumer spending started really going down, then I'd be ready to go. I wouldn't be sitting here waiting to determine whether the inflation is transitory or not. It's time to worry about the real side of the economy. - I can't let you go without asking about Fed independence because it's obviously the other elephant in the room these days.

- Will the President backing off of his comments on firing Jay Powell make it a little bit easier for you all to do your job? - Well, I just try to ignore all this stuff and just focus on the data, focus on doing my job. That's what I try to do every day. You know, criticism of what we do, that's the job. If you don't like being criticized, don't take the job. And the President's free to say whatever they want to, probably just like anybody else.

But central bank independence, as we saw, I think, on Monday, is critical to the well-functioning of the U.S. economy. It has served us well. It allows us to do things in a non-political way. And it's something I worked on in my academic life, research-wise, for 20 years about the value of it. And I don't think there's ever been anything

in the data that shows you that lack of independence is a good thing. Well, would ad hominem attacks like we've seen on chair make it harder for the next chair to do the job? Does the job itself get harmed? I think it's up to the, like I said, it's up to the person that's in the chair. You know, you take the job knowing you're going to be criticized from markets, from Fed watchers, from average consumers. That's part of the job. And if you don't like to be criticized, don't take the job.

So it's really going to be a question of whoever the next chair is. Are they going to come in and keep the tradition of central bank independence, making policy in a nonpolitical way? And for me, that's critical for whoever the next chair is. Chris Waller, thank you very much for your time this morning.

You're the owner of a small business, which means you're also the tech guy and HR and personal assistant and head honcho and intern. You could use another pair of hands like the experts you'll find at Verizon Small Business Days, April 21st through 27th. Get a free tech check, special deals and more. Call 1-800-483-4428 or visit verizon.com slash small business to book your appointment. Verizon Business.