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Former Federal Reserve policymaker Loretta Mester indicated that the U.S. Federal Reserve might implement fewer interest rate cuts than previously anticipated next year, particularly if President-elect Donald Trump’s proposed global tariffs are enacted. Speaking at UBS’s annual European conference in London, Mester emphasized that the Fed’s monetary policy would 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 indeed be correct, suggesting that the number of cuts could be lower than the four previously predicted. “Next year, the pace of cuts will be influenced by the direction of fiscal policy,” she explained, highlighting the potential impact of Trump’s tariff proposals on the economic landscape.
Following Trump’s election victory, markets adjusted their forecasts, reflecting increasing speculation about the implications of his trade policies. Trump has proposed imposing tariffs ranging from 10% to 20% on all U.S. imports and significantly higher rates—between 60% to 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 that the Fed may reduce rates by 50 basis points in the first half of 2025, followed by an additional 25 basis points later in the year. This would position the federal funds rate at 3%-3.25% by the end of 2025, slightly below the Fed’s median projections.
While Mester anticipates fewer than four rate cuts next year, she 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, comprehensive details on the fiscal package and its implications for monetary policy are not expected until early next year.
Mester pointed out that the economic landscape would be shaped not only by tariffs but also by changes in immigration policy and government spending. These factors collectively will influence the Fed’s assessment of the American economy.
The discussion comes amid rising concerns among global policymakers regarding the potential repercussions of Trump’s fiscal strategies, especially his tariff proposals. Olli Rehn, the governor of the Bank of Finland and a member of the European Central Bank, cautioned that the anticipated tariffs could have detrimental effects on the global economy. He stressed 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 stated, “A trade war is the last thing we need,” emphasizing the importance of readiness in the face of potential economic upheaval. As the situation unfolds, the implications of Trump’s policies will remain a focal point for both U.S. and international economic observers.
Associated media – Linked media
