The American economy appears to be just hours away from a major milestone: The first interest rate cut from the Federal Reserve since Covid. Yet there remains an unusual amount of drama over the magnitude of that rate cut, with some in Washington calling for a supersized move.
Massachusetts Democratic Sen. Elizabeth Warren wants the Fed to slash interest rates at a pace rarely seen outside of a full-blown crisis.
In a letter to Fed Chair Jerome Powell on Monday, Warren and two Senate colleagues urged the US central bank to dramatically lower interest rates by three-quarters of a point at this week’s monetary policy meeting.
“Given the Fed’s confidence in inflation moving towards its target of 2 percent and data indicating slower job growth, now is the time to swiftly move forward with rate cuts,” Warren wrote in the letter, which was also signed by Sens. Sheldon Whitehouse and John Hickenlooper.
Wall Street investors are pricing in virtually no chance of a rate cut of this magnitude, nor have any major Fed officials voiced support for a move like this.
Yet Warren, a fierce critic of Powell, warns that the Fed is unnecessarily damaging the job market by holding rates at two-decade highs for so long.
“It is clearly the time for the Fed to cut rates. In fact, it may be too late: Your delays have threatened the economy and left the Fed behind the curve,” the lawmakers wrote, pointing to cooling job growth and higher unemployment.
In the letter, Warren and her colleagues noted that Bill Dudley, former president of the Federal Reserve Bank of New York, recently cautioned that “dawdling now unnecessarily increases the risk” of a recession.
But even Dudley, asked about the Warren-led letter, waved off the idea of a mega cut this week.
“Not going to happen,” Dudley told CNN in an email on Monday. “Even less likely, given it’s coming from one side of the aisle. Why would the Fed do it?”
Although some Wall Street economists and investors are calling for a large interest rate cut of half a point, few if any have endorsed a supersized cut like the Senate Democrats are proposing.
Cutting rates that rapidly would risk panicking already-nervous investors and economists. Some would undoubtedly wonder: What does the Fed know that we don’t?
The Fed typically cuts rates by just a quarter of a point, though during emergencies it has opted to go big.
For instance, in early 2008 the Fed slashed interest rates by three-quarters of a point or more on three occasions. Of course, that turned out to be the months before the worst financial crisis since the Great Depression.
Likewise, the Fed’s last rate cut was a supersized one: In March 2020, with financial markets panicking about Covid, the Powell-led Fed slashed rates by a full point.
Wall Street is pricing in a 100% chance that the Fed cuts rates on Wednesday, with futures markets projecting a 37% chance of a smaller cut of a quarter-point cut and a 63% chance of a half-point cut, according to CME Group’s FedWatch Tool on Monday. There is no chance priced in of a three-quarter-point cut.
David Kelly, chief global strategist at JPMorgan Asset Management, urged the Fed to exercise restraint in cutting rates.
“Cutting short-term interest rates from a peak is a little like hauling a piano down a flight of stairs,” Kelly wrote in a note to clients on Monday. “The operation is best done slowly and with care.”
