Just a few weeks ago, the path forward for the Federal Reserve seemed simple: With inflation slowing and the job market slowing, the Fed seemed on track to gradually reduce interest rates.

In September, officials predicted they would cut the benchmark rate four times next year, on top of three rate cuts this year.

However, this perspective quickly changed. Several surprisingly strong economic reports, combined with policy proposals from President-elect Donald Trump, have led to a significantly more cautious tone from the Fed, which could mean fewer cuts and higher interest rates than expected.

Smaller rate cuts would likely mean continued high mortgage rates and other borrowing costs for consumers and businesses. Car loans would remain expensive. Small businesses would still face high borrowing rates.

In a speech last week in Dallas, Chairman Jerome Powell made clear that the Fed is not necessarily inclined to cut rates at every meeting every six weeks.

“The economy is not sending any signals that we need to rush to lower rates,” Powell said. “The strength we are seeing in the economy right now gives us the ability to approach our decisions with caution.”

His comments were widely seen as a sign of a potential reduction in rate cuts in 2025, a view that sent stock prices tumbling after their sharp rise with Trump’s election.

Trump has proposed higher tariffs on all imports as well as mass expulsions of undocumented immigrants — measures that economists say would worsen inflation. The president-elect also proposed a series of tax cuts and deregulation, which could help spur economic growth, but which would also spur inflation if businesses cannot find enough workers to meet growing demand consumers.

And recent economic data suggests that inflationary pressures may prove more persistent and economic growth more resilient than thought just a few months ago. In his latest press conference, Powell suggested that the economy could even accelerate in 2025.

Wall Street traders and some economists now see only two, instead of four, rate cuts next year. And although the Fed will likely lower its benchmark rate at its mid-December meeting, traders see an almost equal chance that the central bank will leave the rate unchanged.

“I would absolutely expect them to slow the pace of reductions,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “The potential for growth remains strong, which must make us wonder whether they will feel either the need or the ability to cut rates at the pace they previously planned.”

Bank of America economists expect annual inflation to remain “stuck” above 2.5%, above the Fed’s 2% target, partly given the likelihood that Trump’s economic proposals, if implemented, would fuel price pressures. Economists now only expect three rate cuts in the coming months, in December, March and June. And they expect the Fed to stop easing credit once its benchmark rate, now at 4.6%, hits 3.9%.

Krishna Guha, an analyst at investment bank Evercore ISI, wrote last week: “We believe Trump’s impending presidency is helping to spur a shift in tone from the Fed – including Powell – toward a more cautious and more covered on the pace and scale of the crisis. further reductions.”

Trump has pledged to impose 60% tariffs on all Chinese goods and “universal” tariffs of 10 or 20% on everything entering the United States. On Wednesday, a top executive at Walmart, the world’s largest retailer, warned that Trump’s tariff proposals could force the company to raise prices on imported goods.

“The prices will be inflationary for customers,” John David Rainey, Walmart’s chief financial officer, told the Associated Press. Other consumer goods and retail companies including Lowe’s, Stanley Black & Decker and Columbia Sportswear have issued similar warnings.

In trying to assess the appropriate level of interest rates, Fed policymakers face a significant hurdle: They don’t know how much further they can cut rates before reaching a level that neither stimulates nor does not slow down the economy – what is called the “neutral rate”. “Officials don’t want to lower rates so much that they overheat the economy and reignite inflation. They also don’t want to keep interest rates so high that they hurt the job market and the economy and risk a recession.

An unusually wide divergence has developed among the 19 officials on the Fed’s rate-setting committee over the position of the neutral rate. In September, officials collectively predicted that the neutral rate would be between 2.4% and 3.8%. Lorie Logan, president of the Federal Reserve Bank of Dallas, noted that this range is twice as large as it was two years ago.

In a recent speech, Logan suggested that the Fed’s benchmark rate could now be barely above the neutral level. If so, that would mean few additional rate cuts would be necessary.

Other officials disagree. In a recent interview with The Associated Press, Austan Goolsbee, president of the Chicago branch of the Fed, said he believed the neutral rate was much lower than the Fed’s current rate. If so, many more rate cuts would likely be appropriate.

“I still think we’re a long way from what’s considered neutral,” Goolsbee said. “We still have a way to go.”

Perhaps the biggest unknown is how Trump’s proposals for tariffs, evictions and tax cuts will influence the Fed’s rate decisions. Powell stressed that the Fed would not change its policy until it was clear what changes the new administration would actually implement.

However, as is Fed practice, Powell avoided commenting directly on presidential policy. But he acknowledged that Fed economists are weighing the potential effects of a Trump presidency.

“We don’t really know what policies will be put in place,” Powell said. “We don’t know how soon.”

Another factor is that the economy today is very different from when Trump took office in January 2017. With unemployment lower than then, economists say, stimulus measures additional via tax cuts could create more demand than the economy can handle, possibly fueling inflation.

Tax cuts, “starting from an economy near full employment, will lead to inflation and, by implication, higher Fed rates and a stronger dollar,” said Olivier Blanchard, former economist at the International Monetary Fund and senior fellow at Peterson. Institute for International Economics, wrote in a recent commentary.

In 2018, when Trump imposed a series of tariffs on imports from China, as well as steel, aluminum and washing machines, Fed economists produced an analysis of how they should react.

Their conclusion? As long as tariffs were one-time increases and the public did not expect inflation to rise, the Fed would not have to respond by raising its policy rate.

Yet last week, Powell acknowledged that the economy was now different, and that inflation posed a greater threat.

“Six years ago,” he said, “inflation was really low and inflation expectations were low. And now we’re back down, but we’re not back to where we were. C It’s a different situation.”