On Wednesday, the Federal Reserve lowered the federal funds rate another quarter point to 4.375%. The bigger issue for Fed watchers and investors is how much further it can cut rate, and that confronts policymakers with five questions.

What’s the state of the jobs market?

The economy is growing at a 2.8% annual pace, well above the 1.8% trend presumed possible by the CBO, and unemployment is 4.2%.

In the summer of 2023, the economy by any measure was at full employment, yet it added 191,000 jobs a month for the next 15 months—well above the 80,000 population growth and regular immigration would permit.

Irregular immigrants are finding work, and we need 1 to 1.5 million additional legal immigrants to annually enter the workforce to sustain the current pace of economic growth.

Employee compensation is rising 3.9% annually, which should be consistent with inflation at about 2% and productivity growth trending at 1.9%.

Job searches for the unemployed are getting longer and tougher, but lowering interest rates too much could overheat labor markets and boost inflation.

Have we reached price stability?

The Consumer Price Index appears stuck at rising at about 2.7% annually and subtracting food and energy, 3.3%. Headline inflation settling around 2.5% may have to be good enough.

Goods prices have been falling, because oil prices have dropped, China’s property sector and broader economy are in a funk, and Beijing is supporting growth by encouraging overinvestment in manufacturing and pushing subsidized exports on the world.

The cost of shelter and other non-energy service prices are rising about 4.6% a year.

The Fed would be foolish to rely on gluts in oil markets and China’s malaise to last indefinitely and with an eye on services prices, lower interest rates cautiously.

What Has Been the Impact of Rate Cuts so Far?

The federal funds rate is what banks charge one another for overnight loans and that should ripple up the yield curve to lower the 10-year Treasury rate and commercial rates that benchmark off it.

Since the Fed started easing policy in mid-September, the 10-year Treasury rate has risen, not fallen. Mortgage and corporate bond rates across risk profiles are up too.

It appears that investors don’t buy into the Fed’s confidence that inflation is trending to 2%, believe the new Adminitration’s policies will be inflationary and/or expect stronger GDP growth than the historical norm to continue—perhaps thanks to big federal deficits and an anticipated productivity boost from artificial intelligence.

If the Fed lowers interest rates too much, it will exacerbate bond market skepticism and overheat the AI inspired investment boom.

What Will Be the Inflationary Impact of President-Elect Trump’s Policies?

Economics students are taught macroeconomic policy is a scissor—monetary policy and fiscal policy best summarized by the government deficit.

With Mr. Trump macro policy becomes a multiple blade thresher by adding harassing the Fed, tariffs, trimming President Joe Biden’s industrial policies that are boosting supply-creating investments in semiconductors, green industries and electric vehicles and deporting employed immigrants.

With the exception of slapping a 60% tariff on Chinese goods, the new Administration can expect progressive opponents to bring lots of lawsuits.

Mr. Trump can tighten border enforcement and expel criminals and those with outstanding deportation orders. Beyond that it gets messy, and he would face litigation.

Given the millions of irregular immigrants in the country, a limited policy should not be terribly inflationary. But if his policy gets too draconian, it will constrain labor supplies and stoke inflation—big time.

The great lesson of the recent election is that pursuing policies that increase inflation is a hanging offense. Mr. Trump is a lame duck but not his GOP allies in Congress

Expect Mr. Trump to dial back expectations for MAGA change.

What’s the Neutral Inflation-Adjusted Rate of Interest (R*) that Neither Stokes too Much Demand and Inflation nor Slows Productive Investment and Growth?

In its latest projections, the Fed’s target for the long-term federal funds rate is 2.9%. With a 2% target inflation rate, that implies its policymakers estimate R* at 0.9%.

With growth prospects for the U.S. economy much higher than before the pandemic, R* is likely closer to 1.5% to 2.0%.

With inflation around 2.5%, that would put the logical target for the federal funds rate at 4.0% to 4.5. The upper-bound is not very different from where it should be after the Fed’s Wednesday meeting.

Mr. Trump is a real estate developer and by instinct, passions for lower interest rates. Failure to couple effective border enforcement with meaningful, liberalizing immigration reforms would stoke inflation and require much higher interest rates than 4.5%.

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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.