In statements on Tuesday, Loretta Mester, a former member of the US Federal Reserve’s monetary policy committee, said that the central bank may implement smaller interest rate cuts next year than previously expected. She explained that this change in expectations is due to the threats of global tariffs proposed by President-elect Donald Trump.
Mester indicated that the fiscal policy of the new Republican administration may significantly influence the decisions of the Federal Reserve. Once these tariffs are implemented, the US economy may face inflationary pressures, which will make it difficult for the central bank to cut interest rates significantly. In this context, Mester expected that the markets may be right in adjusting their expectations regarding the number of expected cuts, which were initially estimated at four cuts.
It is known that the Federal Reserve relies on a set of economic factors to make monetary policy decisions. Among these factors are inflation, unemployment rates, and economic growth. With increasing talk about tariffs and protectionist policies that Trump may pursue, these factors may change significantly. If the cost of goods increases due to tariffs, higher-than-expected inflation may emerge, which would hinder the Fed’s ability to cut interest rates.
In light of these statements, the focus is likely to shift from monetary easing to assessing the implications of new trade policies. Therefore, financial markets may need to reassess their expectations regarding the Fed’s moves in the coming period. Accordingly, the economic outlook is expected to remain in question in the coming period. It will be important to monitor the developments in the new administration’s tariff and fiscal policies and how they will affect the US economy in general.
The impact of new monetary policies on interest rate cuts: Loretta Mester’s remarks
Former Federal Reserve Monetary Policy Committee member Loretta Mester said during her participation in the panel discussion at the UBS European Annual Conference in London that the pace of interest rate cuts next year may be less than previously expected. She added that the Federal Reserve will rely heavily on the expectations of the fiscal policy of the administration of US President-elect Donald Trump in making its decisions on interest rates.
Mester, who served as the president of the Federal Reserve Bank of Cleveland before retiring earlier this year.
explained: “From my perspective, I think the markets are right. The cuts next year are likely to be less than what was expected last September.” These remarks indicate that the markets may have already adjusted their expectations based on new political developments in the United States, especially.
The impact of tariff proposals on the US economy
Mester’s remarks come at a sensitive time, as financial markets have lowered their expectations for interest rate cuts after Trump’s victory in the recent presidential election. Expectations of smaller cuts reflect concerns about Trump’s proposed tariffs. Since his election campaign, Trump has promised to intensify the trade war with China and other countries.
raising questions about how such policies would impact the US and global economy.
Trump has pledged to impose tariffs ranging from 10% to 20% on all US imports. He has also indicated that tariffs could reach 60% or even 100% on Chinese goods. This promise was part of his election platform aimed at protecting US industries. But economists have warned that these measures could lead to inflation, which could negatively impact the US economy. For imported goods, tariffs could raise the prices of these products.
increasing the cost of living and putting additional pressure on the Federal Reserve to set interest rates.
Market expectations for interest rates in the near future
According to a Reuters poll, the median market forecast is that the Fed will cut interest rates by 50 basis points in the first half of 2025. This will be followed by another 25 basis points in the second half of the year.
which would bring the rate to a range of 3% to 3.25% by the end of 2025. This forecast is slightly lower than the Fed’s median forecast, which had been calling for larger cuts.
This shift in market expectations is a response to the political and economic uncertainty surrounding the incoming administration’s new trade policies. If tariffs continue to weigh on prices, this could contribute to higher inflation.
making it difficult for the Fed to cut interest rates significantly in the future.
Mixed Economic Outlook Under New Policies
It can be argued that Mester’s comments point to a mixed economic outlook for the coming year. While markets had previously expected larger rate cuts.
the evolution of trade policies, particularly those related to tariffs, could change these expectations. Potential moves to raise import tariffs could contribute to higher inflation.
which could force the Federal Reserve to adopt a more cautious policy in adjusting interest rates.
On the other hand, if protectionist policies lead to a decline in global economic activity.
this could lead to a decline in demand for US goods. This decline in demand could lead to a slowdown in economic growth in the US.
which could prompt the central bank to adjust its policies to ease inflationary pressures. Loretta Mester’s comments suggest that the Federal Reserve may take a more cautious approach to interest rate cuts in light of the new trade policies that President-elect Donald Trump may pursue.
Expectations for the next Fed meeting and the impact of fiscal policy
Loretta Mester, a former member of the Federal Reserve’s monetary policy committee.
expects next year to see fewer interest rate cuts than previously expected. Mester stressed that the rate cuts are likely to be less than four in 2025. However, she sees a chance of a rate cut at the bank’s next meeting in December 2024.
when policymakers will review current economic conditions and future expectations.
At the next meeting, Fed members are expected to provide a “preliminary look” at the impact of the Trump administration’s fiscal policy on the US economic outlook.
However, analysts note that full details of the fiscal package and its implications for monetary policy are not expected to be revealed until early next year. Discussions will focus on how Trump’s policies will affect economic growth.
particularly with regard to potential shifts in tariffs, tax policies, and immigration reforms.
In this context, Mester stressed that the impact of tariffs will not be the only factor in determining the Fed’s policy.
saying: “It will not be limited to tariffs alone.
There will be changes in immigration policy, and perhaps also in taxes, and there will be additional spending.” These factors combined will have a significant impact on the US economy.
and it is necessary to evaluate them together to determine whether economic outlook has actually changed.
Global Concern Over Trump’s Fiscal Plans and Their Impact on the Economy
Mester’s statements coincide with global concern over the impact of Trump’s fiscal plans on the global economy. Olli Rehn, Governor of the Bank of Finland and a member of the European Central Bank.
expressed his concerns about repercussions of Trump’s proposed tariffs. In his remarks during a panel discussion at UBS conference in London, Rehn warned that the impact of these tariffs could be “harmful” on the global economy.
