Fed rate cuts may slow due to Trump's tariffs, with next year's rate potentially lower.

Former Federal Reserve official Loretta Mester stated at the UBS Annual European Conference on Japanese foreign exchange dealer picturesTuesday that if U.S. President Trump implements his global tariff policy, the Fed's rate cuts next year might be less than previously anticipated. Mester noted that the new Republican government's fiscal policy has significant implications for monetary policy, limiting the pace of rate cuts next year.

Since Trump won the election, market expectations for rate cuts have gradually decreased, with investors worried that the tariff policy could bring inflationary pressures. During his campaign, Trump promised to impose tariffs of 10% to 20% on imported goods and possibly 60% to 100% on Chinese products. Economists warn that these policies could exacerbate global inflation pressures, forcing the Fed to adjust the extent of rate cuts.

Currently, the market expects that the Fed will cut rates by 1 percentage point in the first half of 2025 and by an additional 25 basis points in the second half, with a possible rate cut of 25 basis points at the December 2024 meeting. This implies that by the end of 2025, the federal funds rate will range between 3% and 3.25%, slightly below the median forecast in the Fed's "dot plot."

Mester expects that the number of Fed rate cuts next year may be fewer than four, but she believes there could still be one cut at the December meeting. Additionally, she emphasized that the impact of the Trump administration's fiscal policy on monetary policy will become clearer once more details are announced early next year. Besides tariff policy, immigration, tax, and spending policies will also influence the U.S. economic outlook.

Meanwhile, global policymakers remain vigilant about the risks that Trump's fiscal policy could trigger. Olli Rehn, the Governor of the Bank of Finland and European Central Bank policymaker, warned that high import tariffs might have negative effects on the global economy and suggested that Europe prepare for potential trade conflicts to avoid repeating the scenario of trade frictions in 2018.

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