Barring an inflation flareup, or an unlikely sudden weakness of the U.S. economy, the next interest rate change should wait until the meeting of the Federal Reserve’s (Fed’s) policy setting committee on March 18-19, 2025.

That would give enough time to incoming legislative and executive authorities to decide on the future course of fiscal policy to cut America’s excessive budget deficit (8% of GDP) and to stop and reverse a rapid growth of public debt ($36 trillion, 123% of GDP).

Proceeding in a coordinated fashion, the two key segments of the policy mix – interest rates and public finances – could be properly calibrated to stabilize public sector accounts while supporting economic growth, employment and price stability.

Informal discussions of the likely members of the new administration suggest that the envisaged trimming of regulations and government offices could also have a considerable impact on public spending.

Foreign trade policies are another variable the Fed must consider because about one-third of the U.S. economic activity is generated in the external sector. Import tariffs, trade quotas and export controls of the incoming government will directly affect costs and prices in American product and service markets.

No rush to cut interest rates

An optimal economic policy mix would, therefore, require a careful assessment of public finances, structural changes and foreign trade policies during the Fed’s forthcoming interest rate deliberations.

Can the Fed hold its next policy moves until mid-March 2025?

The answer is yes.

Most current comments about the U.S. monetary policy are focused on interest rate cuts. As always, financial market traders and politicians are the key advocates of Fed’s largesse. But economists seem tongue-tied – as if they would not dare to oppose such a vastly popular decision.

In my view, there is absolutely no urgency for a new round of boosting the U.S. money supply.

To begin with, one must keep in mind that since the early months of 2021 the U.S. economy has been running well above its physical limits to potential and noninflationary growth. Over the last four-year period, the economy has been advancing at a brisk average annual pace of 3.7% -- a breathtaking speed for an economy whose productivity and labor supply would only allow a noninflationary GDP growth of 1.9%.

The most recent picture is no different. This year, the estimated GDP growth of 3% will be a full percentage point above the physical limits to economic growth with stable prices.

Credit conditions are still easy

And the Fed’s own policy metrics indicate that there is no need to rush into the next interest rate cut -- because the present credit stance is still on the easy side.

Measured against the core CPI of 3.3%, the 4.58% effective federal funds rate (which serves as the policy rate) is only 1.28% in real terms. Similarly, measured against the Fed’s 2.7% preferred inflation indicator (market based personal consumption index excluding food and energy) , the real effective federal funds rate is 1.88%.

Both numbers show that the Fed’s inflation adjusted policy rate has yet to reach its empirically validated neutral position of 2%.

Hence the conclusion: Expansionary or neutral monetary policies are inappropriate for the U.S. economy currently growing way above its noninflationary potential of 1.9%.

So, perish the thought, what would happen if over the next few months we were to see a rising U.S. inflation? After all, the 4.8% inflation in the U.S. service sector – accounting for about 90% of the economy -- is not coming down, and unit labor costs (the floor to any long-term inflation trends) rose at an annual rate of 6.4% in the first three quarters of this year.

Easy money cannot solve the problems of excessive government spending, economy’s structural flaws and deeply unbalanced trade accounts. Those problems must be addressed by the White House and the Congress.

And then the new administration will also have to decide what it wants to do about its increasing engagement in Middle East and Ukraine wars, hostilities in East Asia and a nuclear threat hanging over a tenuous armistice on the Korean Peninsula.

As in the past, decisions on those crucially important security issues will have considerable implications for America’s public finances and price stability.

The Fed will have to play a constructive supporting role by integrating all those public policies into its interest rate decisions in a way that will make possible a sustainable noninflationary growth of American economy.

Meanwhile, the Fed can safely wait to do all that at its mid-March meeting.