Federal Reserve Chairman Powell speaks at a press conference in Washington, DC, on September 18, 2024.
Anna Money Tree | Getty
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, and the market’s prediction may be correct, with fewer rate cuts than the four previously forecast.
“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 probably won’t cut rates as much next year as they envisioned or expected in September,” added Mester, who retired before retiring earlier this year. Serves as president of the Federal Reserve Bank of Cleveland.
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 reignite the trade war that began during his first term, saying he would impose a blanket ban of 10% to 20% on all U.S. imports and impose particularly punitive higher tariffs on U.S. imports. tax rate. 60% to 100% Chinese goods. Economists warn that such measures could stoke inflation.
As a result, the market now expects a 50 basis point rate cut in the first half of 2025 and a further 25 basis point cut in the second half, according to the median poll forecast cited by Reuters. 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 policymakers may then have a “first look” at 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 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 a negative 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.”
