Our website use cookies to improve and personalize your experience and to display advertisements(if any). Our website may also include cookies from third parties like Google Adsense, Google Analytics, Youtube. By using the website, you consent to the use of cookies. We have updated our Privacy Policy. Please click on the button to check our Privacy Policy.
The Fed's interest rate outlook could change with Trump's tariff plans

The Fed's interest rate outlook could change with Trump's tariff plans

Former Federal Reserve policymaker Loretta Mester has indicated that the US Federal Reserve may implement fewer interest rate cuts than previously expected next year, particularly if President-elect Donald Trump's proposed global tariffs are implemented. Speaking at UBS's annual European conference in London, Mester stressed that the Fed's monetary policy will be significantly influenced by the fiscal strategies of a future Republican administration.

Mester noted that the market's revised expectations for interest rate cuts may actually be correct, suggesting that the number of cuts may be fewer than the four previously expected. “Next year, the pace of cuts will be influenced by the direction of fiscal policy,” he explained, underlining the potential impact of Trump's tariff proposals on the economic landscape.

Following Trump's election victory, markets adjusted their forecasts, reflecting growing speculation about the implications of his trade policies. Trump has proposed imposing tariffs of between 10% and 20% on all US imports and significantly higher tariffs – between 60% and 100% – on Chinese goods. Economists have raised alarms about the inflationary effects of such measures, which could complicate the Fed's monetary policy.

Current market expectations suggest the Fed could cut rates by 50 basis points in the first half of 2025, followed by an additional 25 basis points later in the year. This would place the federal funds rate at 3%-3.25% by the end of 2025, slightly below the Fed's median projections.

Although Mester expects fewer than four rate cuts next year, he acknowledged the possibility of one cut at the Fed's next meeting in December. This meeting will likely provide the first insights into how the Trump administration's fiscal policies, particularly tax proposals, will affect economic forecasts. However, full details on the fiscal package and its implications for monetary policy are not expected until early next year.

Mester stressed that the economic landscape will be shaped not only by tariffs but also by changes in immigration policy and government spending. All of these factors will influence the Fed's assessment of the American economy.

The discussion comes amid growing concerns among global policymakers about the potential repercussions of Trump's fiscal strategies, particularly his tariff proposals. Olli Rehn, governor of the Bank of Finland and member of the European Central Bank, warned that the planned tariffs could have damaging effects on the global economy. He underlined the need for Europe to be prepared for such developments, citing the need to avoid a repeat of the unpreparedness experienced during past trade conflicts.

Rehn said: “A trade war is the last thing we need,” underlining the importance of being ready in the face of potential economic upheavals. As the situation evolves, the implications of Trump's policies will remain a focus for both U.S. and international economic observers.

By Roger W. Watson

You May Also Like