In light of the complete U-turn the Federal Reserve has made since inching rates upwards last year, the regulatory body may be now considering slashing rates if inflation continues to fall.
Starting last fall, inflationary pressures began to decrease, which was unexpected given Trump's distinct focus on easy fiscal policy and ample government spending.
Given that inflation is currently hovering at a relatively low rate of 1.8% and may be forecasted to dip even lower, the Fed may raise the topic of potentially cutting rates at the next April 30 FOMC meeting, especially considering that officials have already begun discussing it.
"To make the case for Fed cuts outside of a recession, the FOMC would have to conclude that policy is actually restrictive," say TD Securities analysts.
"Given that most estimates of the neutral rate in the Fed's dot plot are above current levels, Fed officials would have to reduce their estimates of r*. The distribution of longer-run dots have drifted modestly lower, but we see a fairly high hurdle for the median to fall below the current fund rate range. Indeed, a case can be made for a somewhat higher neutral rate - particularly if productivity improves."
The key metric to follow is the core inflation rate, which measures the normal basket of goods excluding more volatile commodity prices like food and energy. If this falls below a rate of 1.5%, many Fed officials such as Chicago's Fed President Charles Evans would be concerned: "I would be extremely nervous about that, and I would definitely be thinking about taking out insurance in that regard" by cutting rates, Evans said.
Another notion to consider is higher productivity rates: if this is the case, then inflation could be lower even though rates should remain at the current level in order to remain neutral. On the other hand, if the inflation rate is reflecting the current strength of the economy and not just higher productivity, then keeping rates where they are could actually exert upward pressure on the real interest rate and further exacerbate a weakening economy.
"To the extent we've got low inflation in an environment with sub-4 percent unemployment, I think that that's indicative of the fact that we don't have an active Phillips curve in this environment, and you have to look to other channels for signals about inflation," said St. Louis Fed President James Bullard.