Federal Reserve Governor Waller: The impact of two tariff prospects on monetary policy. Waller's speech last night is still worth watching. I remember it was the first time the Fed directly explained the impact of different tariff policies on inflation and monetary policy. Of course, we should also pay attention to Waller's dovish stance within the Fed. Key points of speech: 1. Economic impact prediction of two tariff scenarios Scenario 1: Long term maintenance of high tariffs (average of 25%+) 1) Inflation impact It is expected that inflation will increase by 1.5-2 percentage points in the next 12 months, and the core PCE may rise to 5% in the short term, but it is a one-time price shock. If expectations remain anchored, it may fall back to the target level in 2026. Supporting evidence: Historical experience has shown that tariff transmission has a lag, and companies may only partially pass on costs (due to supply chain constraints). 2) Economic growth and employment Corporate investment is frozen due to uncertainty, productivity growth is slowing down, and exports are dragged down by retaliation from trading partners. It is expected that the GDP growth rate will significantly decrease, and the unemployment rate may approach 5% by 2026 Monetary policy response: If the risk of economic recession intensifies, there may be a significant early interest rate cut ("precautionary interest rate cut" logic). Scenario 2: Tariffs gradually fall to 10% 1) Inflation impact The peak inflation has dropped to 3% and is gradually subsiding as negotiations progress. The core PCE may continue its slow downward trend since Q4 2024. 2) Economic growth and policy space The economy is experiencing a mild slowdown, and the resilience of the labor market is supporting consumption. The Federal Reserve can maintain policy patience and determine whether to initiate a "data-driven interest rate cut" in the second half of the year based on inflation data. 2. Monetary policy stance 1) Flexibility first Waller emphasized that the current uncertainty is extremely high and it is necessary to avoid overreacting to a single scenario. He cited research from the Minneapolis Federal Reserve, stating that the optimal policy is to anchor inflation expectations while preventing the risk of an economic hard landing (consistent with the "risk balance" stance of the March 2025 interest rate meeting) 2) Historical lessons Despite the misjudgment of "temporary inflation" in 2021-2022, Waller believes that we should not give up eating for fear of choking and should make independent decisions based on current data (cautious attitude towards the risk of inflation stagnation) 3. Conclusion and Market Insights 1) Short term focus March retail data, progress of tariff negotiations, and inflation expectations indicators (such as TIPS breakeven rate). 2) Policy path prediction If the high tariff scenario comes true, the probability of interest rate cuts in Q3 2025 will increase; If the negotiations ease, it may be postponed to Q4.