Waller’s hopes for a rate cut could be cut short by a 1970s replay

Federal Reserve Governor Christopher Waller moved markets Friday after saying in an interview with my colleague, Steve Liesman, that the central bank could cut interest rates as early as July.

That sparked a short-lived rally in stocks, as rate cut hopes always seem to do, though long-term bond yields rose, rather than fell, on that forecast.

While acknowledging that he was not speaking on behalf of the Federal Open Market Committee, the policy-making arm of the Fed, nor Fed Chair Jerome Powell, Waller suggested that he’s more worried about recent softening in the labor market than he is about the potential inflationary impact of the tariffs, or import taxes, imposed by the Trump administration.

Waller’s argument centers around the notion that import taxes will result in a one-time increase in the price level of imported goods and not provide a re-accelerant for inflation. That’s possible, even plausible, but companies haven’t yet broadly passed on their increased costs to consumers, having loaded up on imports before the tariffs were imposed.

That leaves open the possibility of a delayed increase in prices that, as tariffs persist, and may be further increased in size and scope, could result in more than just a one-off price shock.

And while the jury is out on the impact of tariffs, or import taxes, tariffs alone are not the only inflation input that bear watching.

Since May 5, the price of crude oil has spiked by nearly $20 per barrel, dragging gasoline prices along with it. That will boost consumer prices and hit all Americans in the pocketbook.

Granted, the increase may be somewhat muted as the summer driving season begins to wind down, but the rapid appreciation in energy costs does have the potential to have a more lasting impact on inflation, especially if the U.S. were to become more directly involved in the war between Israel and Iran.

A protracted war with Iran raises the specter of a 1970s re-run in more ways than one.

We’ve also seen gold and silver continue to rally while the dollar continues to decline, potential harbingers of future pressures that have yet to make their way into inflation calculations.

Waller made an interesting point about impending economic weakness, citing the rising unemployment rate among recent college graduates which now tops 7% compared to 5% before the pandemic struck.

But is that the result of economic weakness or rapid technological change that is displacing entry level workers who are losing job opportunities to artificial intelligence?

The is a great deal of evidence that computer science majors are struggling to find work as coding, for instance, is increasingly being taken over by AI. Similarly, back-office work in finance, law and other industries is rapidly being automated, leaving Gen Z college graduates scrambling to find work in areas outside their academic majors.

If that remains true, interest rate reductions will do nothing to assist those young people in obtaining gainful employment.

The U.S. has stressed the importance of STEM education, coding skills and software programming over the last many years just as AI tools were rendering those degrees rapidly obsolete.

Technology experts with whom I’ve spoken are now suggesting that a broad liberal arts education, emphasizing so-called “soft skills” necessary for interpersonal activity, are becoming increasingly more valuable than tech savvy — oops.

Further, as the Fed governor climbs a “Waller of Worry” about the labor markets, he may well have glossed over an important lesson in Fed history.

In 1974, while inflation was briefly calming down and the economy was slowing, a nervous Fed lowered interest rates just before inflation rebounded and began rapidly to reaccelerate.

Waller’s own comments about the stability in the unemployment rate, even as he expressed concerns about job growth, present a conundrum: Why should the Fed rush to cut rates when, while slowing, the unemployment rate remains steady, and no one is yet certain that inflation is dead?

Thankfully, Waller disputed the notion put forth by President Donald Trump that it is also incumbent upon the Fed to cut rates in order to reduce the interest burden on the federal debt.

Waller flatly stated that it’s not the Fed’s job to make government borrowing cheaper — that’s up to the White House and Congress to pass sensible budgets. Props to Waller on that one.

In any event, I’m growing increasingly concerned that the mix of what I believe to be ill-advised tax policies, if coupled with ill-advised monetary policies and rising geopolitical risk, could lead to a replay of the mid-1970s where growth may well stall even as inflation again picks up speed.

With each passing day, the case for stagflation appears, to me anyway, to grow stronger, a view expressed by Fed Chair Powell, though he put it in much milder terms.

As George Santayana is often quoted as saying, “Those who forget their history are condemned to repeat it.” Other say history doesn’t repeat but it rhymes.

Rather than quote Santayana, I’m inclined to quote Karen Carpenter, who once sang, “It’s Yesterday Once More.” Let’s hope not.