Federal Reserve officials wrapped up their final meeting of 2024 with splits surfacing over how many more interest rate cuts they should make given strong economic growth, lingering inflation and huge uncertainty ahead of Donald J. Trump’s return to the White House.
Weeks later, they unanimously pressed pause on rate cuts and now appear unified in their view that the central bank should tread carefully and take its time to see how the economy is evolving under a new administration.
Mary C. Daly, president of the Federal Reserve Bank of San Francisco, reaffirmed that approach in an interview on Monday, saying the central bank does not “need to be pre-emptive at this point.”
“We have policy calibrated for this economy and the one we expect to have, and we’ve got time now to be actively watching to see what else is done,” she said.
The merits of that strategy were on full display on Monday after Canada and Mexico, two of America’s top trading partners, narrowly avoided steep tariffs in an 11th-hour deal with President Trump.
The prospects of another trade war — combined with large-scale deportations, reduced regulation and lower taxes — have upended economists’ expectations. They have also muddied expectations about how much more the Fed can lower rates after reducing them by a full percentage point last year. Ms. Daly said she was focused on the “net effect” of Mr. Trump’s policies, rather than assessing each one individually.
“If a policy change is going to spur growth, which ultimately pushes down inflation, at the same time that there’s something that picks it up a little bit, then you don’t know what the net effect is going to be until you have more details about the policy,” she said.
“Until we know more about scope, magnitude and timing and how those features move through the economy, then we’re really doing nothing more than speculating,” Ms. Daly added. “The easiest way for a policy mistake is to speculate.”
Ms. Daly said she was still “comfortable” with Fed officials’ projections published in December, which indicated broad support for half a percentage point in cuts this year. That would bring interest rates down to a range of 3.75 percent to 4 percent.
“I think we have to have a very open mind about whether fewer or more will be needed,” she said, referring to the number of cuts.
The range of outcomes underscores how high inflation has complicated the Fed’s job and cast uncertainty about whether its old playbooks, like those related to trade tensions, still apply.
The last time the Fed confronted a trade war that was led by Mr. Trump, it took early action to prevent the economy from weakening too much. The Fed lowered interest rates three times over consecutive meetings in the summer and fall of 2019, action that was later billed as taking out “insurance” against the economic impact of his trade war.
“The world is different right now,” Ms. Daly said. “History is a data point, but it’s not a playbook.”
At the time of Mr. Trump’s first trade war, inflation was consistently below the Fed’s 2 percent goal and global economic growth forecasts had turned downbeat. Companies across the country were also beginning to retrench, as uncertainty chilled business activity.
The biggest contrast today is that inflation is still above 2 percent. That is a problem because consumers and businesses are likely to be more sensitive to anything that may risk resurgent prices. The Fed may be compelled to act if there are signs that expectations of inflation are getting unmoored — something that Ms. Daly said was “critical” to take into account.
“The thing that’s reassuring is that longer-run inflation expectations, which is really what we keep our mind on, haven’t really moved at all,” she said.
Giving the Fed further leeway to stand pat is a labor market with “no sign” of weakness, Ms. Daly said. “The economy is in a very good place,” she added.
The Fed will monitor the January jobs report, released on Friday, for any evidence that this is changing. Economists expect slower growth than the 256,000 positions added in December, in part reflecting annual revisions by the Bureau of Labor Statistics that incorporate new data.
“There’s not pessimism among businesses,” Ms. Daly said. “In fact, if anything, they’re more optimistic now than they were in the latter half year.”
