The Trump administration's tariff policies are a major shock to the U.S. economy that could lead the Federal Reserve to cut interest rates to head off recession even if inflation remains high, or alternately leave little lasting imprint if they turn out to be a negotiating tool, Fed Governor Christopher Waller said Monday.

In analyzing alternatives, Waller said, the Fed for now is left torn between a path in which the economy may "slow to a crawl" and unemployment rise to 5%, and one that looks little different than it did a few weeks ago.

If the full suite of tariffs planned by President Donald Trump remains in effect, the impact on inflation may still be temporary, Waller said, but the "effects on output and employment could be longer-lasting...If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the...policy rate sooner, and to a greater extent than I had 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," he said.

By contrast if eventual negotiations limit the tariffs to an average of around 10%, "the outlook for monetary policy might not look much different than it did before March 1," before the Fed's last meeting and the bulk of the tariff announcements, Waller said. "With a fairly small tariff effect on inflation, I would expect inflation to continue on its path down towards our 2% target. In this case, 'good news' rate cuts are very much on the table in the latter half of this year."

In that case, he said, an economy that entered the year on a solid footing might slow, but not as dramatically or persistently as if tariffs are kept, as proposed, at an average as high as 25%.

Waller emphasized in remarks prepared for the Certified Financial Analysts Society of St. Louis that part of the dilemma for the Fed is knowing where the administration is heading.

"The new tariff policy is one of the biggest shocks to affect the U.S. economy in many decades," Waller said. "Given that there is still so much uncertainty...I have struggled, like many others I have talked with, to fit these varying possibilities into a single coherent view of the outlook."

The Fed in March held its policy rate steady in the 4.25% to 4.5% range with officials still projecting three quarter-point rate cuts this year.

But officials have also said the tariff policy, which Waller referred to as the "elephant in the room" of Fed discussions, had made even the short-term outlook unpredictable.