FX.co ★ Fed may reduce rate cuts because of Trump

The influence of Donald Trump, the president-elect, cannot be overstated! His impact on every aspect of life in America is enormous. Loretta Mester, a former Fed official, firmly believes this. She suggests that in 2025, the US central bank may cut interest rates less than previously expected. This will depend on whether Donald Trump implements or not his global tariff plans.

According to Mester, the Fed’s outlook must align with the fiscal plans of the Republican administration. Naturally, this forced market participants to anticipate fewer rate cuts.

“Next year, the pace of the cuts will be affected by where they’re seeing fiscal policy,” Loretta Mester said during a panel at the annual UBS European Conference hosted in London.

After Trump’s election win, markets adjusted their forecasts for interest rate reductions. This shift reflects growing pessimism about his tariff proposals and their potential effects on the global economy.

During his campaign, Trump vowed to continue the trade war with China, which began during his first term. He declared his readiness to impose a blanket ban, including a 10%-20% tariff on all US imports and a 60%-100% tariff on Chinese goods. Economists warn that such measures could have negative consequences.

Median forecasts now suggest the Fed will cut rates by 50 basis points in the first half of 2025 and another 25 basis points in the second half. This would bring the federal funds rate to 3%-3.25% by the end of 2025—slightly below the central bank’s "dot plot" projections.

Mester predicts fewer than four rate cuts in 2025 but notes that “there is still potential for the bank to cut at its next meeting in December.”

Next month, analysts and market participants expect the Fed to respond to the Trump administration’s fiscal proposals. Mester believes the Fed may have to revise its forecasts. However, detailed information about the fiscal package’s effects on monetary policy will only emerge early next year.

“It’s not just going to be tariffs. There’s things going on on immigration, there’s probably going to be things going on on the tax side, and there’ll be spending also,” the former Fed official concluded.