Former Fed hawk: The market is right, the number of rate cuts next year will decrease!

Former Federal Reserve policymaker Loretta Mester said on Tuesday that the Fed may reduce interest rates more times next year than previously expected if the global tariffs proposed by President-elect Trump are implemented.

Mester pointed out that the Fed's outlook will change with the fiscal plans of the incoming Republican administration, the market may be correctly predicting fewer than the previously expected four rate cuts.

“Next year, the pace of rate cuts will be influenced by fiscal policy,” she said during a panel discussion at the annual UBS Europe Conference in London.

Mester added, “My own view is that the market is right; the number of rate cuts next year may not be as many as assumed or expected in September.” Mester served as president of the Cleveland Fed before retiring earlier this year.

The market has reduced its expectations for rate cuts following Trump's election victory last week, with increasing speculation about his tariff proposals and their impact on the global economy.

Trump promised during his campaign to intensify the trade war that began during his first term, stating that he would impose a universal tariff of 10% to 20% on all U.S. imports, with particularly punitive rates of 60% to 100% on Chinese goods. Economists warn that such measures could trigger inflation.

As a result, according to a median survey cited by Reuters, the market now expects a 100 basis point rate cut in the first half of 2025, followed by another 25 basis point cut in the second half.

Economists surveyed by Reuters also expect a 25 basis point cut at the December 2024 meeting. This would bring the federal funds rate down to 3% to 3.25% by the end of 2025, slightly below the Fed's median "dot plot" forecast.

Mester also expects fewer than four rate cuts next year, but she stated that she still sees potential for a rate cut at the Fed's meeting next month.

At that time, policymakers may provide an “initial view” on how Trump's fiscal proposals will affect their forecasts, Mester said. However, further details of the complete fiscal plan—and its impact on monetary policy—are not expected to be released until early next year.

“It's not just about tariffs. There are dynamics in immigration, there may be actions on taxes, and there will be spending,” Mester said. “All these factors combined will tell us whether the outlook for the U.S. economy has changed?” she added.

As global policymakers grow increasingly concerned about the impact of Trump's fiscal plans, particularly tariffs, Olli Rehn, the governor of the Bank of Finland and ECB policymaker, warned on Tuesday that the impact of such tariffs would be “harmful” to the global economy, adding that Europe needs to be prepared for it.

“Significant import tariffs proposed verbally could have negative consequences for the global economy,” Rehn said during the UBS panel discussion.

“A trade war is the last thing we need,” he continued. “If a trade war breaks out, the EU cannot be unprepared as it was in 2018.”