Fed governor Chris Waller continues to sound more dovish than his colleagues. His colleagues have mostly highlighted (from a strikingly simple song sheet) the importance of defending low inflation expectations, come what may—with little unfurling of a reaction function beyond that. What does a not-quite-so-mainstream, net dovish reaction function look like in mid-April 2025? Take Waller: Waller lays out a “large tariff” scenario (current avg tariff rate of 25% remains in place for some time) and a “smaller tariff” scenario (the announced minimum of 10% tariff remains but the others are eliminated over time). In the large tariff scenario: • Core PCE rises to around 4% or 5% this year depending on how much of the cost increases businesses successfully pass through, but the effects on inflation are temporary or transitory and the Fed can look through it. • They are temporary because inflation expectations remain anchored, policy is restrictive, and a substantial economic slowdown ensues, putting downward pressure on prices. • “I can hear the howls already that this must be a mistake given what happened in 2021 and 2022. But just because it didn’t work out once does not mean you should never think that way again. Let me use a football analogy to characterize my thoughts. You are the Philadelphia Eagles and it is fourth down and a few inches from the goal line. You call for the Tush Push but fail to convert by running the ball. Since it didn’t work out the way you expected, does that mean that you shouldn’t call for the Tush Push the next time you face a similar situation? I don’t think so. With the history of 2021 and 2022 still in my mind, I believe my analysis of the effect of tariffs is the right call, and I am going to stick with my best judgment.” • If the tariff-induced slowdown is significant and threatens a recession, “I would expect to favor” cutting sooner and faster than previously thought. • “With a rapidly slowing economy, even if inflation is running well above 2%, I expect the risk of recession would outweigh the risk of escalating inflation, especially if the effects of tariffs in raising inflation are expected to be short lived.” In the smaller tariff scenario: • The effects on inflation are much smaller, with the peak effect on inflation at around 3% annualized • It may take more time for these cost increases to hit the economy, so the peak may be lower but dissipates more slowly. This would call for a “limited monetary policy response” with reduced pressure to lower rates because recession risks would be lessened. • The Fed could consider cutting rates in the second half of the year if it becomes convinced that underlying inflation is still moving to 2%.