Federal Reserve Chairman Powell speaks at a press conference in Washington, DC, on September 18, 2024.
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Former Fed policymaker Loretta Mester said on Tuesday that the Federal Reserve may cut interest rates next year less than previously expected if President-elect Donald Trump’s proposed global tariffs take effect.
master It shows that the Fed’s outlook will change based on the incoming Republican administration’s fiscal plan, with the market predicting that the number of interest rate cuts may be fewer than the four previously predicted.
“Next year, the pace of cuts will be affected by their view on fiscal policy,” she told a panel at UBS’s annual European conference in London.
“My personal view is that the market is right and they may not cut rates as much next year as they assumed or expected in September,” added Mester, who served as Cleveland chief executive before retiring earlier this year. Chairman of the Federal Reserve Bank.
After Trump won the election last week, markets lowered expectations for a rate cut and speculation grew about his tariff proposals and their impact on the world economy.
Trump vowed during the campaign to intensify the trade war that began during his first term and said he would impose tariffs of 10% to 20% on all U.S. imports, with a specific penalty of 60% to 100% on U.S. imports. sex tariffs. Economists warn that such measures could stoke inflation.
As a result, the market now expects a 1 percentage point cut in the first half of 2025, followed by a further 25 basis points cut in the second half, according to the median poll forecast cited by Reuters. Economists polled by Reuters also expect a 25 basis point rate cut at the December 2024 meeting. That would take the federal funds rate to 3% to 3.25% by the end of 2025, just below the midpoint of the central bank’s “dot plot” forecast.
Mester also expects fewer than four rate cuts next year, though she said she still thinks a rate cut is still possible at the bank’s next meeting in December.
Mester said that by then, policymakers may have a “first taste” of how the Trump administration’s fiscal proposals will affect their forecasts. However, further details of the full fiscal package and its implications for monetary policy are not expected to be released until early next year.
“It’s not just about tariffs. There’s something going on with immigration, there’s probably going to be something going on with taxes, and there’s going to be spending,” Mester said.
“All of this has to be told – ‘Has the U.S. economic outlook changed?'” she added.
At the same time, global policymakers are increasingly concerned about the impact of Trump’s fiscal plans, especially the tariff plan.
Olli Rehn, the governor of Finland’s central bank and a policymaker at the European Central Bank, warned on Tuesday that the impact of such a tax would be “harmful” to the world economy, but added that Europe needed to prepare for such a possibility.
“Several verbal import tariffs could have an adverse impact on the global economy,” Rehn told a UBS panel.
“A trade war is the last thing we need,” he continued. “If a trade war breaks out, the EU must not be as unprepared as it was in 2018.”
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