Urges Immediate Emergency-Style Reduction in Interest Rates by Federal Reserve, according to Elizabeth Warren
In a email to Federal Reserve Chair Jerome Powell on Monday, Massachusetts Democratic Sen. Elizabeth Warren and two other Senate comrades urged the US central bank to drastically decrease interest rates by three-quarters of a point at this week's monetary policy meeting.
"Considering the Fed's confidence in inflation moving towards its target of 2 percent and data showing slower job growth, this is the perfect moment to swiftly implement rate cuts," Warren wrote in the email, which was also signed by Sens. Sheldon Whitehouse and John Hickenlooper.
Financial market investors are betting on a zero chance of such a significant rate cut, nor have any major Fed officials expressed support for such a move.
However, Warren, a vocal critic of Powell, claims that the Fed is causing unnecessary damage to the job market by keeping interest rates at levels not seen in two decades.
"It's high time for the Fed to lower interest rates. In fact, it might be too late: Your delays have threatened the economy and left the Fed playing catch-up," the lawmakers wrote, pointing to slower job growth and higher unemployment.
In the email, Warren and her colleagues referred to the warnings of Bill Dudley, former president of the Federal Reserve Bank of New York, who said that "delays unnecessarily increase the risk" of a recession.
Even Dudley, when asked about the Warren-led letter, dismissed the idea of a massive cut this week.
"Not going to happen," Dudley told CNN in an email on Monday. "Even less likely, given it's coming from one party. Why would the Fed do it?"
Although some Wall Street economists and investors are arguing for a sizable interest rate cut of half a point, few, if any, have backed a jumbo cut like the Senate Democrats are proposing.
Such rapid cuts could spook already jittery investors and economists, prompting questions like, "What information does the Fed have that we don't?"
The Fed usually cuts interest rates by just a quarter of a point, although during emergencies, it has opted for more drastic measures.
For instance, in early 2008, the Fed reduced interest rates by three-quarters of a point, or more, on three separate occasions. Notably, these were the months leading up to the worst financial crisis since the Great Depression.
Similarly, the Fed's last rate cut was a whopper: In March 2008, with financial markets panicking about Covid, the Powell-led Fed reduced rates by a full point.
According to CME Group’s FedWatch Tool on Monday, there's a 100% chance that the Fed will decrease interest rates on Wednesday. Futures markets predict a 37% chance of a smaller cut of a quarter-point and a 63% chance of a half-point cut, but there's zero chance of a three-quarter-point cut priced in.
David Kelly, chief global strategist at JPMorgan Asset Management, advised the Fed to proceed with caution when lowering interest rates.
"Lowering short-term interest rates from a high is akin to moving a piano down a staircase," Kelly wrote in a note to clients on Monday. "The operation is best carried out slowly and carefully."
The senators' proposal to lower interest rates by three-quarter points is a drastic step that goes against the current trends in the financial market and the Fed's officials' sentiments. Despite slow job growth and higher unemployment, the Fed usually implements rate cuts of only a quarter of a point.
The ongoing debate about interest rate cuts in the economy has businesses closely watching the decisions made by the Fed, as these changes can significantly impact their operations and profitability.
