Loose cycle encounters tariff "roadblock"? Former Fed officials: interest rate cuts next year may be less than previously expected

Former Federal Reserve official Loretta Mester said on Tuesday that if President Trump implements his global tariff policy, the Fed's interest rate cuts next year may be lower than previously expected. She believes that the market's expectations for this prospect are reasonable. Mester pointed out during a panel discussion at the annual UBS European Conference in London that the Fed's policy outlook will be adjusted due to the fiscal policy of the new Republican government. She stated, "The pace of interest rate cuts next year will be influenced by fiscal policy." She also indicated that the market's expected interest rate cuts may be lower than those anticipated in September. Since Trump won the election last week, expectations for future interest rate cuts have decreased, as concerns about Trump's tariff policy and its impact on the global economy have risen. During his campaign, Trump promised to continue the trade war he started in his first term, planning to impose tariffs of 10% to 20% on all imported goods and punitive tariffs of up to 60% to 100% on Chinese products. Economists warn that such measures could lead to inflationary pressures. According to a Reuters survey, the market currently expects the Fed to cut interest rates by 1 percentage point in the first half of 2025, and further cut rates by 25 basis points in the second half of the year. Additionally, the Fed may cut rates by 25 basis points at its meeting in December 2024, which would bring the federal funds rate to between 3% and 3.25% by the end of 2025, slightly lower than the median forecast in the Fed's "dot plot." Mester expects that the Fed will cut interest rates fewer than four times next year, but she believes there is still a possibility of a rate cut at the next meeting in December. She stated that policymakers may "get a first read" on the potential impact of the Trump administration's fiscal policy on monetary policy at that time. However, the full details of the fiscal plan are not expected to be released until early next year, when the specific impact on monetary policy will become clearer. Mester further pointed out that aside from tariff policy, immigration, tax, and spending issues will also be key factors that need to be considered in evaluating whether the economic outlook in the United States has changed. Meanwhile, global policymakers are increasingly vigilant about the risks posed by Trump's fiscal policy. Olli Rehn, Governor of the Bank of Finland and policy maker at the European Central Bank, warned on Tuesday that high import tariffs could have adverse effects on the global economy and that Europe needs to be prepared for such risks. He stated, "A trade war is the last thing the world needs, and if a trade war breaks out, the EU must avoid being caught unprepared as it was in 2018."