Former Federal Reserve chair Loretta Mester recently shared her insights on the potential impact of President-elect Donald Trump’s proposed global tariffs on interest rate cuts. Speaking at the annual UBS European Conference in London, Mester indicated that the Fed’s outlook for next year could shift under the incoming administration’s fiscal plans, leading to fewer rate reductions than previously anticipated.
Following Trump’s election victory, markets revised their expectations for rate cuts, with concerns mounting over the implications of his tariff proposals for the global economy. Trump has pledged to escalate a trade war by imposing substantial tariffs on U.S. imports, including a significant increase on Chinese goods. Economists have cautioned that such measures could fuel inflation and disrupt international trade.
As a result, median poll forecasts cited by Reuters now project a 1 percentage point cut in the first half of 2025, with an additional 25 basis point reduction in the second half of the year. Economists also anticipate a 25 basis point cut at the December 2024 meeting, potentially bringing the fed funds rate to 3% to 3.25% by the end of 2025.
Mester echoed these sentiments, suggesting that the Fed may not implement as many cuts next year as initially assumed. However, she emphasized the possibility of a rate decrease at the upcoming December meeting, where policymakers are expected to assess the implications of the new administration’s fiscal policies on economic forecasts.
Meanwhile, global policymakers, including Olli Rehn of the Bank of Finland, have expressed concerns about the adverse effects of Trump’s tariff plans on the world economy. Rehn warned of the detrimental impact of potential trade wars and emphasized the need for the European Union to prepare for such scenarios.
The uncertainty surrounding Trump’s fiscal agenda has raised questions about the future trajectory of interest rates and its implications for economic growth. With key decisions looming, financial markets and industry experts are closely monitoring developments to gauge the potential ramifications on monetary policy and market stability.
