- Three senators called for the Fed to cut interest rates by 0.75%.
- FedWatch data indicates investors don’t believe such a sizable cut this month is in the realm of the possible.
- A mega cut like that would also probably send the wrong message about the state of the economy.
The Federal Reserve needs to step on the gas and cut interest rates by 0.75% at its next Federal Open Market Committee meeting on Wednesday.
That’s according to Democratic Senators Elizabeth Warren, John Hickenlooper, and Sheldon Whitehouse, who wrote a letter to US Federal Reserve Chair Jerome Powell on Monday.
“For months we have been calling upon you to cut the federal funds rate,” the senators wrote. “Your delays have threatened the economy and left the Fed behind the curve.”
High interest rates were constraining the labour market and pushing the US economy towards a recession, the Democrats wrote.
Interest rates, now in a range between 5.25% and 5.5%, should immediately be cut to 4.5% to 4.75%, the lawmakers said, with the aim of bringing them down anywhere between 3% to 3.5% — a level they described as “a lot closer to neutral.”
“Employment numbers adjust slowly, so the Fed should frontload rate cuts to avoid sliding towards a potential crisis,” the senators wrote.
It’s the fourth time this year Warren has pressed Powell to cut rates, at least in writing. The senator from Massachusetts first called for lower interest rates in March.
Wednesday meeting
High interest rates make borrowing more expensive and incentivizes investors to buy risk-free US Treasury bills, constraining liquidity in the financial system.
Lowering interest rates, consequently, makes it easier for people to take out loans. It also pushes investors to gain exposure to risk-on investments like stocks. Bitcoin, like tech stocks, tends to perform particularly well in low-rate environments.
Powell announced on August 23 that the US central bank will cut interest rates at the next FOMC meeting, scheduled for September 18.
The market is assigning a 41% chance that rates will be cut by 0.25%, and 59% that they will be cut by 0.5%, per FedWatch data. Currently, there is virtually no chance that the 0.75% cut demanded by the senators will happen.
However, the market gives 79% odds that interest rates will be slashed to anywhere between 4.25% and 4.75% in November, meaning that investors expect the Fed to make at least one or two larger-than-ordinary cuts of 0.5% or 0.75%.
But big rate cuts aren’t necessarily better for the market, because they can be seen as a signal that policymakers are panicking and that they view the economy as being dangerously weak.
“The 50 [basis point] cut might send a wrong message to markets and the economy. It might send a message of urgency and, you know, that could be a self-fulfilling prophecy,” George Lagarias, chief economist at consulting firm Forvis Mazars, told CNBC two weeks ago, when poor economic data raised the possibility of a recession again.
At the time, Matt Hougan, chief investment officer at crypto investment firm Bitwise, posted on X that the US central bank was unlikely to make a drastic move.
“0.5% is radical for the Fed,” Hougan wrote. “There’s only one instance in the last 40 years when it has gone 0.5% during a non-emergency. I struggle to see it. Still, it will be nice to move into the rate-cutting cycle.”
Tom Carreras writes about markets for DL News. Got a tip about Powell, Warren, interest rates, or Bitcoin? Reach out at tcarreras@dlnews.com
