Central Banking in the Age of Chaos-Monkey Tariff Threats: It Would Not Be That Hard for Fed Governor Chris Waller to Do His Job Professionally
& yet it seems to be beyond him to do that? I mean, the principal thing that even an obsequious Professional Republican economist should be doing right now is pushing Trump to end the tariff chaos...
& yet it seems to be beyond him to do that? I mean, the principal thing that even an obsequious Professional Republican economist should be doing right now is pushing Trump to end the tariff chaos-monkey threats of disruptive inflationary supply-side shocks, and turn to making headlines on other issues. It would be clearing a very low bar to have the ovaries to make that push. Yet that appears to be a bar Waller does not want to clear…
This, from Fed Governor Christopher Waller, is unhelpful:
Maria Eloisa Capurro: Waller Says Fed Should Cut Rates Now With Labor Market on Edge <https://www.bloomberg.com/news/articles/2025-07-17/waller-says-fed-should-cut-rates-now-with-labor-market-on-edge>: ‘Federal Reserve Governor Christopher Waller said policymakers should cut interest rates this month to support a labor market that is showing signs of weakness. “With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate…. I believe it makes sense to cut the FOMC’s policy rate by 25 basis points two weeks from now…. Looking across the soft and hard data, I get a picture of a labor market on the edge…. Policy should look through tariff effects and focus on underlying inflation, which seems to be close to the FOMC’s 2% goal…”. Waller said inflation expectations remain anchored and wage growth isn’t accelerating, easing concerns of a persistent inflation effect…
I understand that Waller (a) as someone primarily a professional Republican rather than a central banker feels he needs to bend the knee to Donald Trump, and (b) thinks that he would be a better Fed Chair than a Kevin Warsh, a Kevin Hassett, a Michelle Bowman, or a Scott Bessent, (c) is probably right on that, and (d) needs to be an enthusiastic Trumpist to stay in the running for the nomination. And so I would give him a bye for this if he had been an inflation dove under the Biden Administration. He wasn’t.
Thus this is a bad look.
On the policy merits, as I see them:
The Fed’s current interest rate configuration is highly likely to be above the neutral rate.
Hence the Fed should be putting the interest rates it controls on a downward path if risks are balanced.
Risks ain’t balanced.
Trump chaos-monkey tariff shocks continue—and the risk is that someday Trump will get mad at financial markets’ characterization of him as TACO, Trump Always Chickens Out, and a tariff-retaliation significant supply-shock spiral will start.
And we have just used up one of our bursts of transitory inflation, and we do not know whether inflation expectations turn from inertial to adaptive after one such, two such, or three such. But we do know that anchored inflation expectations can now resist one fewer transitory burst than back in 2020.
Hence the prudent thing, the professional central-banker thing, the work-for-the-American-people-rather-than-for-your-political-masters thing for the Fed to do is to stand pat, for now.
It is only appropriate to “look through tariff effects and focus on underlying inflation” if there are no additional tariff shocks coming down the turnpike. But there are. Thus, had Waller wanted to serve the FOMC while advancing his Waller-for-Fed-Chair campaign, he ought to have combined his “Fed should cut” rhetoric with “tariff uncertainty needs to end and final tariff deals need to be struck before an August 1 deadline”.
He did not do that.
And his colleagues should be rightly pissed at him.
Better by far, I think, is Adriana Kugler:
Catarina Saraiva: Fed’s Kugler Says Appropriate to Hold Rates for ‘Some Time’ <https://www.bloomberg.com/news/articles/2025-07-17/fed-s-kugler-says-appropriate-to-hold-rates-for-some-time>: ‘Federal Reserve Governor Adriana Kugler saidbthe US central bank should keep holding interest rates steady “for some time,” citing accelerating inflation as tariffs start to boost prices.b“Given the stability in the employment side of our mandate, with the unemployment rate still at historically low levels, elevated short-run inflation expectations and goods inflation rising due to the upward pressure from tariffs, I find it appropriate to hold our policy rate at the current level for some time…. This still-restrictive policy stance is important to keep longer-run inflation expectations anchored…”. Kugler gave several reasons why a larger impact on prices from tariffs may still be coming, arguing some businesses are waiting to pass higher costs on to consumers due to built-up inventories and frequent shifts in trade policy. The Fed’s patient approach this year has enraged Trump…
Bottom line: The Federal Reserve’s institutional credibility hangs on its willingness to resist succumbing to the Arthur Burns disease. The constant message from the Fed to the Executive needs to be that if the Executive wants the Fed to follow certain policies, it needs to adjust its own priorities and actions in order to make it prudent for the Fed to do so. Each opportunity to make that point that is missed is a slow undermining of the foundations of economic stability and growth.
The ghost of Milton Friedman is really displeased with Christopher Waller.
References:
Capurro, Maria Eloisa. 2025. “Waller Says Fed Should Cut Rates Now With Labor Market on Edge.” Bloomberg, July 17, 2025. https://www.bloomberg.com/news/articles/2025-07-17/waller-says-fed-should-cut-rates-now-with-labor-market-on-edge.
Saraiva, Catarina. 2025. “Fed’s Kugler Says Appropriate to Hold Rates for ‘Some Time’.” Bloomberg, July 17, 2025. https://www.bloomberg.com/news/articles/2025-07-17/fed-s-kugler-says-appropriate-to-hold-rates-for-some-time.
You need to invent a term (as emotionally effective as Chaos Monkey) to describe people who discard a lifetime of principle (including wrong ones like the Laffer curve) to bend the knee. Quisling is accurate but not as emotionally satisfying. Defectors? Koolaiders? (except no one believes they believe their statements.
It's like the 2+2=5 sequence in 1984. Perhaps Fivers except it's too obscure.
Anyhow I look to your muse.
Bank regulation may turn out to be at least as important as interest rates. Bank capital requirements will be de facto lowered, resulting in more share repurchases. The only part of bank lending that is growing is loans to shadow banks (non-depository financial...). For banks, lower Fed Funds may merely generate more leverage on private credit.
The Fed, along with other regulatory agencies, will cheer on the golden age of fraud. This won't be from a Greenspan-type free market ideology, but from sheer corruption. Fraud is worse than credit failures because the collateral tends to be worthless, and it undermines confidence in large swathes of the financial system.