Waller flags persistent shocks, cautious Fed policy approach
Federal Reserve Governor Christopher J Waller discussed the US economic outlook and monetary policy implications, highlighting persistent inflation pressures from the Middle East conflict and a weakening labor market due to immigration changes. He emphasized a cautious approach to future policy decisions.
Two shocks reshape policy considerations
Waller noted that in late February, underlying inflation, excluding temporary tariff effects, was running close to 2 percent, while the labor market showed signs of weakening.
Two critical developments then reshaped the outlook: the start of the conflict with Iran, disrupting energy production and sending global energy prices sharply higher, and a more complete understanding of labor market supply.
Net immigration fell significantly in 2025 and 2026, combined with an aging population, means very little net job creation is needed to absorb new workers.
This unique development is a significant factor for monetary policy.
PCE prices were up 2.8 percent in February, with core prices at 3 percent, both above the 2 percent goal.
Labor market shifts, energy prices surge
The labor market exhibits near-zero growth, driven by an aging population and declining net immigration, which fell to minimal levels in 2025 and 2026.
This implies that a healthy labor market now requires very little net job creation, a significant shift.
Payroll growth has become highly volatile, alternating between positive and negative numbers, complicating assessment.
Employers are hesitant to shed workers but also to hire due to uncertainty, creating vulnerability.
Post-conflict, energy prices rose sharply, with gasoline rising over one-third and Brent crude reaching $95 per barrel.
March inflation data showed a 10.8 percent jump in the CPI energy component, pushing headline inflation to 3.3 percent and core to 2.6 percent.
Learning from past shocks
Waller outlines two scenarios for the Middle East conflict, expressing concern that markets may be underestimating the risk of prolonged disruptions.
He warns that a sequence of 'transitory' price shocks, similar to the pandemic era, could lead to a more lasting increase in inflation.
This necessitates a cautious approach from policymakers, moving beyond the standard practice of looking through temporary price spikes.