A likely slowdown in the pace of rate cuts by the Federal Reserve could disappoint borrowers…

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

When trying to determine the right level for interest rates, Fed policymakers face a major hurdle: They don’t know how much further they can cut rates before they reach a level that neither stimulates nor constrains the economy—the so-called “neutral rate.” » Officials are reluctant to cut rates that low because it would overheat the economy and reignite inflation. They also don’t want to keep rates so high that they hurt the labor market and the economy and risk a recession.

There was unusually wide disagreement among the 19 officials on the Fed’s rate-setting committee about where the neutral rate should lie. In September, officials collectively predicted that the neutral rate would be in the range of 2.4% to 3.8%. Lori Logan, president of the Federal Reserve Bank of Dallas, noted that the range is double what it was two years ago.

In a recent speech, Logan suggested that the Fed’s benchmark rate might now be just slightly above neutral. If this is the case, it will mean that several additional rate cuts will be required.

Other officials disagree. In a recent interview with The Associated Press, Austan Goolsbee, president of the Chicago Fed, said he believes the neutral rate is much lower than the Fed’s current rate. If this is the case, then a further reduction in rates would probably be appropriate.

“I still think we are a long way from what anyone would consider neutral,” Goolsby said. “We still have ways to go down.”

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

However, as is typical at the Fed, Powell avoided direct comments on the president’s policies. But he acknowledged that Fed economists are assessing the potential impact of a Trump presidency.

“We don’t really know what policies will be adopted,” Powell said. “We don’t know what time frame.”

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

Tax cuts “starting with an economy close to full employment will lead to inflation and, as a result, higher Fed rates and a stronger dollar,” said Olivier Blanchard, a former lead economist at the International Monetary Fund and a senior fellow at Peterson. Institute of International Economics, wrote in a recent comment.

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

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

But Powell acknowledged last week that the economy has changed and inflation is a bigger threat.

“Six years ago,” he said, “inflation was really low and inflation expectations were low. And now we have gone down, but we have not returned to where we were. This is a different situation.”